Asset Allocation Dynamics of Pension Funds

35 Pages Posted: 20 Apr 2016

See all articles by Dennis Bams

Dennis Bams

Maastricht University - Department of Finance; DLL

Peter C. Schotman

Maastricht University - Department of Finance

Mukul Tyagi

Maastricht School of Business and Economics

Date Written: March 20, 2016

Abstract

How does portfolio of long-term investors like pension funds change relative to the stated strategic portfolio? We investigate their portfolio dynamics using an international database that spans over 20 years and focus on portfolio rebalancing. We find that a significant proportion of the change in the weight of equity is related to passive change in portfolio due to realized equity returns. Moreover, pension funds follow asymmetric rebalancing, they rebalance poorly when stock market is doing well but rebalance strongly when stock market is doing poorly. Actual change in equity portfolio only partially reflects strategic changes. We also study cross-sectional differences in rebalancing. The results indicate that US and defined benefit pension funds rebalance less. Moreover, external managers and active managers can be identified as the major source of poor rebalancing. Lastly, between asset classes, pension fund are more passive in alternative investments.

Keywords: Institutional Investors, Pension Funds, Asset Allocation, Portfolio Rebalancing

JEL Classification: G11, G23

Suggested Citation

Bams, Dennis and Schotman, Peter C. and Tyagi, Mukul, Asset Allocation Dynamics of Pension Funds (March 20, 2016). Netspar Discussion Paper No. 03/2016-016, Available at SSRN: https://ssrn.com/abstract=2766491 or http://dx.doi.org/10.2139/ssrn.2766491

Dennis Bams

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

DLL ( email )

Eindhoven
Netherlands

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

Mukul Tyagi (Contact Author)

Maastricht School of Business and Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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