Pension Funds Interconnections and Herd Behavior

Abstract

Strategic investment decisions in pension funds are made by trustees. In making these decisions, trustees contract independent advisors such as asset managers and actuaries. Can these external advisors transfer their investment beliefs to the pension funds they contract with? We use proprietary data with the names of asset management firms and individual actuaries that service multiple pension funds to answer this question. We find that pension funds make similar decisions on strategic asset allocations in the presence of a common asset manager or a common actuary, despite significant differences in their liability structures, funding levels, or sizes. The effect is particularly strong in alternative asset classes, such as private equity, hedge funds, and real estate. If two pension funds increase their strategic allocation to alternatives by 10 percentage points in one year, then a third pension fund that contracts the same asset manager increases its strategic allocation to alternatives by 2.5 percentage points, all else being equal. The common-advisor effect might lead a pension fund to select a strategic asset allocation that is not in line with its liability structure, funding ratio, sophistication level, or organizational structure.