Abstract
This study examines performance of mandatory and voluntary pension funds in the 2004 – 2008 period. Furthermore, we present a methodology based on principal components that can aid affiliates when selecting funds. Moreover, we examine two portfolio optimization methodologies to evaluate any performance improvements in an evaluation period when choosing a particular methodology. The first one suggested by Markowitz (1952) and the second by Reveiz and Leon (2008b). We find an increase in risk, using several metrics, of mandatory and voluntary pension funds as well as a set of funds that better characterize the common movement of funds’ returns. No evidence was found in regards to economically or statistically significant gains of applying either optimization methodology using several holding periods.
Highlights
Colombia has both mandatory and voluntary pensions
In the literature we found several studies on mandatory pension funds in Colombia that evaluate performance and how legal restrictions and current incentives affect investment policies and returns offered to affiliates
This section discusses the results on performance of mandatory pension funds and the performance analysis, fund selection and portfolio allocation applied to two of the most representative voluntary pension funds (Protección and Skandia) for the period 2004 – 2008
Summary
Colombia has both mandatory and voluntary pensions. In the former, affiliates to the pension system receive a pension, after making mandatory contributions during working years, by means of the pension fund administrators (Administradoras de Fondos de Pensiones -AFPs, for their abbreviation in Spanish) authorized by Law 50 of 1990 and/or by the Social Security Institute (I.S.S. for their abbreviation in Spanish). In the literature we found several studies on mandatory pension funds in Colombia that evaluate (portfolio) performance and how legal restrictions and current incentives affect investment policies and returns offered to affiliates. The main contribution of this document is, in addition of studying performance of mandatory pension funds for the 2004-2008 period, to analyze performance of different investment alternatives (or funds) offered by two of the most representative voluntary pension funds as well as to propose a methodology to select assets that can be replicated by funds’ affiliates when making investment decisions. The third section discusses the results, and the fourth section includes some concluding remarks
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