Pension Fund Equity Performance: Patience, Activity or Both?

Abstract

We study how pension fund (out)performance is influenced by a) a pension fund's activity, i.e., how much the pension fund deviates in its stock allocation from the typical pension fund behavior, and b) whether the pension fund exploits short- or long-term mispricing opportunities (measured by stock holding duration). We do not find that high activity or higher holding duration, separately, lead to higher risk adjusted returns on average. However, if high activity is paired with long-term holdings, the pension fund's performance increases. Quantitatively, if an active pension fund with a duration of one year increases its duration by one month, annual returns tend to increase by 3.3%. Our findings indicate that some pension funds are patient enough to exploit long-term mispricing opportunities.