Asset Allocation Policy Research Articles

Green bond and green stock in China: The role of economic and climate policy uncertainty

Green finance (GF) plays a key role in combating climate change and advancing sustainable economic development. At the same time, governments have enacted various policies to pursue climate action and economic stability simultaneously, resulting in economic policy uncertainty (EPU) and climate policy uncertainty (CPU). While the EPU and CPU may have an impact on the GF market, they may also interact with each other and the impact of this interaction has received little attention. Therefore, it becomes crucial to understand how EPU and CPU affect GF. This paper explores the relationships among green bonds (GB), green stocks (GS), EPU and CPU in the context of China. Firstly, the nonparametric quantile causality test reveals the existence of causality in EPU/CPU-GB, EPU/CPU-GS, EPU-CPU, and GB-GS. The cross-quantilogram test result indicates that the negative predictive effects of EPU and CPU on the GF market are mainly concentrated at the extreme quantiles and an interaction exists between CPU and EPU. In addition, a negative correlation between the GB and GS markets is found in the short term suggesting that investors may achieve hedging risk and/or portfolio diversification if investing in these two green financial assets. The findings shed light for policymakers and relevant investors on how EPU and CPU shocks affect GF, and provide ideas on how to effectively hedge (deal with) these shocks in the asset allocation (policy making) process, thereby enhancing the development of the GF market.

Analysis of the influence of asset allocation policy, investment manager performance, and risk level on the performance of Sharia money market mutual funds in Indonesia

Background: Islamic money market mutual funds have become an alternative to conventional investment instruments. This research has novelty in determining the variables of mutual fund performance by combining risk and return factors, asset allocation policy variables, and investment manager performance, which have a high impact on the return and risk level in reducing the risk of loss on investment. In addition, this research was conducted on the performance of Islamic money market mutual funds that have not been studied before. Methods: This research uses data on Islamic money market mutual funds registered with the Financial Services Authority in Indonesia. The performance of Islamic money market mutual funds was calculated using the Sharpe Method and tested using multiple regression analysis. Results: The results showed that the asset allocation policy, investment manager performance, and the level of risk simultaneously have a significant effect on the performance of Islamic money market mutual funds in Indonesia; however, partially, there is no significant effect between (1) the asset allocation policy on the performance of Islamic money market mutual funds in Indonesia: (2) investment manager performance on the performance of Islamic money market mutual funds in Indonesia, and (3) the level of risk on the performance of Islamic money market mutual funds in Indonesia. Conclusions: The results indicated that optimization of returns and risks was needed by considering the composition of asset allocation, choosing the right investment manager, and conducting a good risk level analysis to obtain optimal Islamic money market mutual fund performance.

Dynamic optimal adjustment policies of hybrid pension plans

In this paper, we propose two methods to dynamically adjust the contribution rate and the benefit rate of the hybrid pension fund: the semi-transparent case and the transparent case. The adjustment coefficients (time-varying or constant) and the asset allocation policy are controlled to minimize the disutility of the adjustment risk and the unsustainable risk. The adjustment rates are proportional to the unfunded liability (gap) of the hybrid pension fund, and the gap is estimated by the dynamically updated contribution and benefit rates. This forms the nested structure of the optimization problem, which could be solved based on a multi-dimensional stochastic control problem. The results show that the optimal policy adjusts the contribution and the benefit rates fairly among the cohorts and reduces the terminal fund gap effectively in the two cases. Comparing with the semi-transparent case, the adjustment risk is more undertaken by the current participants and the pension rules are more stable after a long time in the transparent case.

Asset Allocation Policy Analysis, Share Selection, and Level of Mutual Fund Risk in Indonesia

This research aims to analyze the performance of equity mutual funds in Indonesia by observing their asset allocation policy, stock selection, and risk level. This research uses pooled data, the data choosing with purposive sampling. Data availability at: www.portalreksadana.com, www.bi.go.id,www.lps.go.id, and www.finance.yahoo.com. The sample consists of 63 items of equity mutual funds since January 2017 until December 2019. The hypothesis of this research are examined using the multiple regression. The result of this research shows that equity mutual funds performance is affected by asset allocation policy, stock selection, and risk level. It indicates that mutual funds performance is determined by those activities of investment managers and market return conditions

An Empirical Evaluation of Alternative Asset Allocation Policies for Emerging and Frontier Market Investors in Africa

An Empirical Evaluation of Alternative Asset Allocation Policies for Emerging and Frontier Market Investors in Africa

Assessment on Effective Investment During Inflationary Period in Ethiopia

The purpose of this study is to scope the best possibilities for allocation of investable funds during inflationary periods in Ethiopia. The findings are based on conversations with major stakeholders, by reviewing the literature into options and in consultation with financial scholars in Ethiopia. The study offers a menu of effective cash utilization, assesses their suitability for Ethiopia context and their feasibility in the light of financial sector developments in the country.The basic premise of this study is that ultimately what is of concern to an investor, whether a household or an institutional investor, is the real value of its investments in terms of purchasing power. The issue to be addressed is which investment strategy make sense in an economic environment in which a major factor (although certainly not the only one) to be considered is substantial uncertainty about the future level of the prices of those goods and services. By investment strategy I mean decisions about how to allocate investable funds among two major investment classes: Ownership Investments and Lending Investments. The chapter is organized as follows. I will first discuss why it is real or inflation-adjusted rates of return and their uncertainty which ought to be the main concern of investors. I will then present the factors that affect investment which will state the direct and indirect factors which impact the decision making of the investors, examine the real rates of return on the two investment categories. Finally, I will discuss the implications of my findings for individual and institutional asset allocation policies. Keywords: Inflation, Investment, Bond, Stock and Real Estate DOI: 10.7176/RJFA/12-13-03 Publication date: July 31 st 2021

The Influence of Assets Allocation, Inflation Levels, and Return Jakarta Composite Index (JCI) On Mutual Fund Performance

This research is conducted to know the performance of equity fund by using Sharpe Ratio and look for asset allocation relationship, inflation rate and return of JCI to the performance of the mutual fund. The population in this study are all effective stock mutual funds and registered in OJK during the period January 2012 to December 2016. The sample in this study was selected by Purposive Sampling. The population of 236 mutual funds, taken as many as 67 mutual funds that meet the criteria of sampling. This research is correlation research. Analysis method used in this research is panel data regression. The results obtained that the asset allocation policy partially significant effect on the performance of equity funds while the inflation rate and returns JCI partially have no effect on the performance of equity funds. Simultaneous test with F statistic test obtained that asset allocation, inflation rate, and return of JCI together have an effect on to performance of equity fund. Increase/decrease of asset allocation, inflation rate, and JCI's return simultaneously affect the increase/decrease of sharpe ratio of equity fund. However, based on the value of R-square the influence is very small only equal to 1.88 percent, while 98.12 percent of the rest influenced by other factors

PENGARUH KEBIJAKAN ALOKASI ASET DAN TINGKAT RISIKO TERHADAP KINERJA REKSA DANA DI INDONESIA (PERIODE 2016-2018)

This study aims to determine, explain and analyze the effect of asset allocation policies and risk levels on the performance of Islamic mutual funds in Indonesia (Period 2016-2018). The independent variable in this study is the Asset Allocation Policy and Risk Level, while the dependent variable in this study is the Performance of Sharia Mutual Funds. The sample selection technique used purposive sampling and used 10 samples of Islamic mutual funds. The method used to calculate the performance of Islamic mutual funds is the Sharpe Ratio. The method used is quantitative methods with descriptive approach to the verification by descriptive statistical tests, classic assumption, multiple linear regression analysis, coefficient of determination, and hypothesis testing using Software SPSS 16. The results show that asset allocation policy variables and the level of risk has a positive and significant impact on the performance of Islamic mutual funds registered with the OJK and still active in the 2016-2018 period. The coefficient of determination test results show that the value of Adjusted R Square is 0.461. The results of 46.1% state that the independent variable can explain the dependent variable, while the remaining 53.9% is explained by other factors not examined in this study.

Optimal contribution rate of PAYGO pension

ABSTRACT In this paper, we study the optimal contribution rate of pay-as-you-go (PAYGO) pension under a Nash equilibrium between the participants and the government. Given the fixed contribution rate, the participants of different cohorts choose optimal consumption and asset allocation policies to achieve their objectives. Using the variational method, we derive the closed-form solution. The value function of the participants is monotonous with respect to the PAYGO contribution rate under constant population growth rate. As such, we modify the ‘Samuelson-Aaron’ criterion that the preference between PAYGO and fully funded pensions depends not only on the demography, investment and salary parameters but also on the age of the cohort. Moreover, we establish the critical age to separate the preference and the ex-post admissible scope for the contribution rate adjustment. As a central planner, the government is fully aware of the participants' optimal feedback functions. The objective of the government is to maximize the overall utility of the participants weighted by each cohort's population. For a shrinking population, the fully funded scheme is more preferable and only the elderly cohorts prefer PAYGO scheme. However, taking into account the larger political power of the elderly cohorts in the objective function, the optimal contribution rate raises slightly.

The cross-section of industry equity returns and global tactical asset allocation across regions and industries

This study investigates which index characteristics predict returns in the cross-section of local industry indexes in six regions. The results show that geographical origin and market capitalization of indexes critically determine the predictive ability of characteristics. We find that industry indexes of any market capitalization with high earnings-to-price ratio yield higher expected returns in the US, Europe, and Asia-Pacific. Recent winner (loser) portfolios in Europe have a tendency to outperform (underperform) recent loser (winner) portfolios in the near future for all groups of market capitalization. Small portfolios with high idiosyncratic volatility in Asia-Pacific earn an idiosyncratic volatility premium. Dividend yield is positively related to future returns of small European portfolios. These results are robust to the inclusion of transaction costs and control variables and have implications for portfolio managers following a global tactical asset allocation policy.

Corrections Should Trigger Rebalancing

We start from the provocative contention that if an investor did not rebalance earlier this year (2020), then that investor does not have an asset allocation policy. More specifically, that investor does not have a rebalancing policy to preserve their asset allocation. We then work backward from a presumption that a correction needs to induce a rebalancing trade and develop an algebraic solution for the width of the rebalancing range to ensure it does so. Across a range of reasonable assumptions, rebalancing ranges need to be tighter than traditional norms. TOPICS:Statistical methods, portfolio construction, risk management Key Findings • Wealth managers promising benefits from rebalancing need to deliver on that promise. • Corrections and bear markets, surprisingly, do not trigger traditional rebalancing ranges. • We develop a nontrivial analytical expression for rebalancing ranges that will trigger in a stock market correction and find they encourage much tighter rebalancing ranges.

FACTORS AFFECTING THE PERFORMANCE OF HAJJ FUND INVESTMENT IN MALAYSIA

This study aims to analyze the effect of Investment Costs, Investment Size and Asset Allocation Policy on Investment Performance of Hajj Funds in Malaysia. The method used in this study is a quantitative method with Malaysia Hajj Financial Report Financial Data for 2008 - 2017 and data analysis techniques using non-parametric linear regression analysis with theil method. The results of this study indicate that all three factors together have a significant effect on the investment performance of Hajj funds. However, only Investment Costs are significant to the Investment Performance of the Hajj Fund. While the Investment Size and Asset Allocation Policy are not significant to the Investment Performance of the Hajj Fund in Malaysia.

A robust bank asset allocation model integrating credit-rating migration risk and capital adequacy ratio regulations

In this paper, we consider a bank asset allocation problem with uncertain migration risk of credit ratings and capital adequacy ratio (CAR) regulations. In the practical scenarios, the future market values of each risky asset are largely affected by outer complex environments. We only observe the information about their first-moment and marginal second-moment of year-ahead market value of each loan asset. Based on these scenarios, we propose a new distributionally robust optimization model with the chance constraint characterized by uncertain CAR. Following the duality theory in infinite-dimensional optimization problem and the theory of conic linear optimization model, we can reformulate the original problem into a tractable linear deterministic semi-definite programming (SDP) model. By using this tractable linear SDP model, we can provide a robust asset allocation policy to bank managers. Further, we conduct a simulation study to illustrate the application of our method under two different economic conditions, a downward condition and an upward condition. Then a series of sensitivity tests is applied to examine the impacts of various factors, including safety probability, target CAR and recovery rate, on the optimal asset allocations. We also compare the performance of our model and the CVaR model. We demonstrate our model provides an efficient way to deal with the trade-off between expected return and CAR.

Optimal Portfolio and Consumption Policies with Stochastic Volatility

Optimal asset allocation and consumption policies have been important issues in finance in the past decades. We study these issues under constant relative risk aversion (CRRA) utility functions in a general setting: stochastic volatility, incomplete markets and finite investment horizons. So far, numerical computation has been the main method for obtaining solutions in this general setting. We present a closed-form approximate solution for this dynamic optimization problem. We show that our theoretical predictions are in good agreement with numerical results and our approximation error is even smaller than the parameter-estimation errors in underlying dynamics.

Does the Asset Allocation Policy Affect the Performance of Climate-Themed Funds? Empirical Evidence from the Scandinavian Mutual Funds Market

The aim of this paper is to evaluate the performance of climate-themed mutual funds, taking into consideration the structure of their asset allocation, especially their geographical focus of investment. Additionally, the influence of differences in the industry allocations on the funds’ investment results is evaluated. Our analyses are based on climate-friendly mutual funds registered in Scandinavian countries (i.e., Denmark, Norway, and Sweden) during 2010–2019. To classify the analyzed funds as climate-friendly, we use the relative carbon footprint measure, which is a novelty in studies on ESG funds (meeting the environmental, social, and corporate governance criteria). In our analyses, we use the absolute performance as well as the relative performance methods. The obtained results confirm that geographical and industrial asset allocations significantly affect the performance of Scandinavian climate-friendly funds. On the basis of our studies, we may state that analyzed mutual funds do not get abnormal returns, and their performance mostly depends on the market state. Additionally, the unconditional firm size factor did not influence the return of particular portfolios, while the conditional firm size factor was significant for European, global, and North American funds. Moreover, the firm value factor was significant. Finally, the momentum factor was only significant for the emerging markets portfolio when it reached positive values.

KiwiSaver fund performance and asset allocation policy

PurposeThis paper aims to examine the performance and benchmark asset allocation policy of 70 KiwiSaver funds catergorised as growth, balanced or conservative over the period October 2007-June 2016. The study focuses on the sources for returns variability across time and returns variation among funds.Design/methodology/approachEach fund is benchmarked against a portfolio of eight indices representing eight invested asset classes. Three measures were used to examine the after-fee benchmark-adjusted performance of each fund: excess return, cumulative abnormal return and holding period returns difference. Tracking error and active share were used to capture manager’s benchmark deviation.FindingsOn average, funds underperform their respective benchmarks, with the mean quarterly excess return (after management fees) of −0.15 per cent (growth), −0.63 per cent (balanced) and −0.83 per cent (conservative). Benchmark returns variability, on average, explains 43-78 per cent of fund’s across-time returns variability, and this is primarily driven by fund’s exposures to global capital markets. Differences in benchmark policies, on average, account for 18.8-39.3 per cent of among-fund returns variation, while differences in fees and security selection may explain the rest. About 61 per cent of balanced and 47 per cent of Growth funds’ managers make selection bets against their benchmarks. There is no consistent evidence that more actively managed funds deliver higher after-fee risk-adjusted performance. Superior performance is often due to randomness.Originality/valueThis study makes use of a unique data set gathered directly from KiwiSaver managers and captures the long-term strategic asset allocation target which underlines the investment management process in reality. The study represents the first attempt to examine the impact of benchmark asset allocation policy on KiwiSaver fund’s returns variability across time and returns variation among funds.

Optimal Longevity Risk Management in the Retirement Stage of the Life Cycle

The uncertainty in life expectancy plays a critical role in individual financial planning. Its impact is magnified during the retirement years (the wealth distribution stage of the life cycle), as new sources of income typically are not available to retired persons. Utilizing a multi-stage stochastic program, the authors model and solve the optimal asset allocation problem of a retired couple with uncertain life expectancy in the presence of a term life insurance policy. In the base case, they find optimal policies assuming no longevity risk (i.e., lifetime scenarios are uncertain although life expectancy is fixed on the retirement date). Next, they introduce longevity risk in the scenario generation stage through either a shift in the expected lifetimes or an unexpected cut in periodic retirement income. The authors find that the optimal asset allocation policy depends on the presence and the type of these risks, as well as the relative price of insurance and the size of any cut in pension benefits.

Lifetime Active Portfolio Selection for Investments and Consumption A Bull Bear Market Cycle Based Probabilistic Approach

Beyond the single period Modern Portfolio Theory (Markowitz, 1955), the seminal work by Robert C. Merton (1969) solved elegantly a multi-period (finite time horizon) continuous portfolio optimization problem under the random walk market assumption. Due to the mathematical challenges, there has been little further theoretical breakthrough in nearly half century. Instead, popular financial planning and investment practice such as time diversification and target-date/glide-path based funds, deviate from the Merton/Samuelson’s teachings of long term static allocation. From a more realistic view of capital market and financial planning economics, what is the right asset allocation policy for lifetime investments and consumption? In this study, I replace the simplified stock market assumption in the classical Merton model with a Markov chain Bull/Bear market regime switching formulation (Wonham, 1965). The bull or bear market probability is calculated based on the price history of a broad market index such as the S&P 500 Composite. To maximize the total utility of discounted consumptions and bequest wealth value at the end of lifetime planning horizon, I derive a quantitative portfolio selection rule. It turns out that dynamic weight to risky asset is approximated solely as a quadratic function of the conditional bull market probability. From a market timing perspective, the active probabilistic rule has both trend following and mean reversion mechanisms at different stages of the anticipated market cycle. For practical purposes, I demonstrate the analytical approach in two sets of back-tests under different investment/consumption preferences. First, for a pure investor with zero consumption requirements, the objective reduces to maximizing terminal wealth. I found the optimal dynamic investment leverage or exposure to a risky stock market index depends not only on investor risk preference and the index’s average attributes of market return premium and volatility, but also the “strength” of the bull/bear market cycles, and the point-in-time market regime probability itself. Second, random walk or bull/bear market characteristics assume no impact on how an investor values the utility of his/her bequest wealth relative to lifetime consumption. In this case, the probabilistic portfolio selection is shown to out-perform easily in total utilities either the buy-and-hold static allocation or a typical linearly de-risking target-date glide path. By integrating the cyclical capital market view into a multi-period portfolio optimization framework, the current probabilistic formulation is ground breaking, despite the need for further refinement and analysis. With a fast changing landscape in global markets, the current approach of market cycle based dynamic allocation and active management is particularly important. It has the potential to seriously impact the theory and practice of investment management and financial planning, for the long term.

The role of active management and asset allocation policy on government and corporate bond fund returns

The role of asset allocation policy and active management on equity mutual fund returns has been a popular research topic, while there is almost no literature on the subject covering bond funds. We check sources of performance for Israeli corporate and government bond funds, which together account for above 70% of the Israeli mutual fund market, using a unique monthly database of approximately 10-years. Our results reveal that active management is far more important than policy for corporate bond fund returns, which is mainly attributable to managers' security selection skills. The reverse is true for government bond funds and strategic long term policies account for a larger part of excess market return variability. Furthermore, if we take into account management fees, government bond funds lose from active management. The greater heterogeneity of investments open to corporate bond funds is a possible explanation for the difference in results.

The contribution of market movements, asset allocation and active management to Islamic equity funds’ performance

Where the performance of Islamic equity funds (IEFs) comes from? Is it from market movements, asset allocation policy or from active portfolio management? Our study is the first to tackle this question in the Islamic funds context. We use a database covering 281 IEFs for the period 2007-2016, and we test the role of each factor in explaining their returns. We find that market movements dominate the others components explaining nearly 50% of the monthly return variability and that, taking together, asset allocation policy and active management explain approximately the second half of IEFs returns. We argue that the IEFs underperformance observed by the existing literature could come from an inefficient and too important active portfolio management.