Changes In Asset Allocation Research Articles

Local Network Interaction as a Mechanism for Wealth Inequality

Given limited institutional resources, low-income populations often rely on social networks to improve their socioeconomic outcomes. However, it remains in question whether small-scale social interactions could affect large-scale economic inequalities in under-resourced contexts. Here, we leverage population-level data from one of the poorest South African settings to construct a large-scale, geographically defined, inter-household social network. Using a multilevel network model, we show that having social ties in close geographic proximity is associated with stable household asset conditions, while geographically distant ties correlate to changes in asset allocation. Notably, we find that localised network interactions are associated with an increase in wealth inequality at the regional level, demonstrating how macro-level inequality may arise from micro-level social processes. Our findings highlight the importance of understanding complex social connections underpinning inter-household resource dynamics, and raise the potential of large-scale social assistance programs to reduce disparities in resource-ownership by accounting for local social constraints.

The Impact of Inflation on Institutional Investors' Behaviour in the Indian Stock Market

Inflation has a significant impact on equity markets as it can lead to a reduction in purchasing power and a reduction in real income, which in turn affects the cost of equity. While inflation generally has a negative impact on equity markets, it can have a positive effect in some cases. Investors in the Indian stock market can react to inflation by adapting their investment strategies, including changes in asset allocation, sector rotation, risk management, monitoring central banks ‘activities and adjusting their investment horizon. Institutional Investors (IIs), such as pension funds, insurance companies and mutual funds, may adjust their investment strategies in order to include more inflation-linked assets, such as Treasury Inflation-Protected Securities (TIPS) or inflation-indexed bonds, in order to preserve their purchasing power. In addition, their portfolios can be reallocated to assets less susceptible to the negative effects of inflation, such as equities, gold and real estate. Institutional Investors can also move their investments to sectors that tend to perform well during inflationary periods, such as consumer staples, utilities and natural resources. In addition, risk management strategies, such as diversification, hedging, or investment in inflation-protected securities, may be used to protect portfolios from inflation-induced volatility. Finally, Institutional Investors closely monitor the central bank's activities, such as interest rates of the Reserve Bank of India (RBI) and monetary policy adjustments, which may affect inflationary expectations and market sentiment. This study aims to analyse the impact of inflation on Institutional Investors’(IIs) investment behaviour in the Indian stock market.

Capital market development over the long run: the portfolios of UK life assurers over two centuries

AbstractWhat shapes and drives capital market development over the long run? In this paper, using the asset portfolios of UK life assurers, we examine the role of regulation, historical contingency, and political reactions to events on the long-run development of the UK capital market. Government response to events such as war, hegemony-secured peace, and the wider macroeconomic environment was the ultimate determinant of major changes in asset allocation since 1800. Furthermore, when we compare the UK with the United States, we find that regulation played a limited role in shaping the asset portfolios of the UK life assurance industry.

Capital Market Development Over the Long Run: The Portfolios of UK Life Assurers Over Two Centuries

What shapes and drives capital market development over the long run? In this paper, using the asset portfolios of UK life assurers, we examine the role of regulation, historical contingency and political reactions to events on the long-run development of the UK capital market. Government response to events such as war, hegemony-secured peace, and the wider macroeconomic environment was the ultimate determinant of major changes in asset allocation since 1800. Furthermore, when we compare the UK with the United States, we find that regulation played a limited role in shaping the asset portfolios of the UK life assurance industry.

The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2016

This report analyzes data on a group of consistent Roth IRA investors — those holding accounts with the same financial services provider at the end of each year from 2007 through 2016 — drawn from The IRA Investor Database to gain insight into how Roth IRA investors fared during and after the financial crisis. In addition, it analyzes Roth IRA contributions, conversions, withdrawals, asset allocation, and account balances in 2016 by investor age. After setting the scene in terms of financial developments and regulatory changes affecting Roth IRAs, chapter 1 analyzes the contribution, conversion, rollover, and withdrawal activity for 2.2 million consistent Roth IRA investors (those with accounts at the end of each year from 2007 through 2016). The chapter also explores changes in asset allocation and account balances among consistent Roth IRA investors. The rest of the report focuses primarily on a snapshot of 5.9 million Roth IRA investors aged 18 or older at year-end 2016. Chapter 2 notes that the vast majority of new Roth IRAs opened in 2016 were opened with contributions. It examines contribution activity by investor age, exploring which Roth IRA investors had contributions and how many of them contributed at the maximum legal limit. Chapter 3 looks at how conversion activity varied by investor age in 2016, and briefly touches upon rollover activity, which is rare in Roth IRAs. Chapter 4 explores withdrawals, which very few Roth IRA investors take in any given year, likely discouraged by the five-year holding period and early withdrawal penalties. In addition, in contrast to traditional IRA investors, Roth IRA investors are not required to start distributions at age 70½ (unless the Roth IRA is inherited). Chapter 5 reports variation in Roth IRA balances by investor age. Chapter 6 compares the asset allocation of Roth IRA balances among cross sections of Roth IRA investors at year-end 2007 and year-end 2016, focusing on the changes in allocation to equity holdings by investor age.

Forecasting Long-Term Equity Returns: A Comparison of Popular Methodologies

Many investors need to make long-term asset class forecasts for planning and portfolio construction purposes. We examine the empirical performance of two different approaches to forecasting future ten-year equity returns: a regression methodology using CAPE and a more traditional “building block” approach. The regression approach produces estimates that are poor predictors of subsequent actual returns. The “building block” approach (BBA) outperforms the regression methodology (in terms of root mean squared error) with the repricing component helping to capture periods of poor equity returns. A high CAPE value is not necessarily cause for alarm and changes in asset allocation. If an investor plans to use a methodology that over time will prove more accurate, then the historical record is more supportive of the BBA approach, with or without a repricing component based on current P/E.

The IRA Investor Profile: Traditional IRA Investorss Activity, 2007-2014

Using data from year-end 2007 through year-end 2014, this report analyzes data on traditional IRA investors drawn from The IRA Investor Database to gain insight into how traditional IRA investors fared during and after the financial crisis. After setting the scene in terms of financial developments and regulatory changes affecting traditional IRAs, chapter 1 analyzes the contribution, rollover, and withdrawal activity among 4.9 million consistent traditional IRA investors (those with accounts at the end of each year from 2007 through 2014). In addition, this chapter explores changes in asset allocation and account balances among consistent traditional IRA investors. The remaining chapters of the report primarily focus on a snapshot of traditional IRA investors at year-end 2014. Chapter 2 discusses how contribution activity varied by investor age in 2014, exploring which traditional IRA investors had contributions and how many of them contributed at the limit. Chapter 3 notes that the vast majority of new traditional IRAs opened in 2014 were opened with rollovers, and examines rollover activity by investor age. Chapter 4 explores withdrawal activity, which varies significantly with investor age and in reaction to rules governing withdrawals. Few traditional IRA investors younger than 60 take withdrawals; traditional IRA investors taking withdrawals tend to be older and often take out the required minimum distribution (RMD) amount. Chapter 5 reports variation in traditional IRA balances by investor age. Chapter 6 compares snapshots of the asset allocation of traditional IRA balances among cross sections of traditional IRA investors at year-end 2007 and year-end 2014. Because some of the variation in asset allocation appears to be related to traditional IRA balance size, the asset allocation of balances of $5,000 or less are compared with the asset allocation of balances of more than $5,000. Smaller balances often have high allocations to money market funds or other cash instruments, which in part may reflect default investment rules for certain rollovers.

What Does Consistent Participation in 401(k) Plans Generate? Changes in 401(k) Plan Account Balances, 2010–2015

This paper analyzes changes in 401(k) account balances of consistent participants in the EBRI/ICI 401(k) database over the five-year period from year-end 2007 to year-end 2012. About 34 percent, or 7.5 million, of the 401(k) participants with accounts at the end of 2007 in the EBRI/ICI 401(k) database are in the consistent sample. Analysis of a consistent group of 401(k) participants highlights the impact of ongoing participation in 401(k) plans. The analysis also looks at changes in asset allocation between year-end 2007 and year-end 2012. Overall, the average account balance of consistent 401(k) participants increased at a compound annual average growth rate of 6.8 percent from 2007 to 2012, to $107,053 at year-end 2012. The median 401(k) account balance increased at a compound annual average growth rate of 11.9 percent over the period, to $49,814 at year-end 2012. At year-end 2012, the average account balance among consistent participants was 67 percent higher than the average account balance among all participants in the EBRI/ICI 401(k) database. The consistent group’s median balance was almost three times the median balance across all participants at year-end 2012. Younger participants or those with smaller initial balances experienced higher percent growth in account balances compared with older participants or those with larger initial balances. Three primary factors impact account balances: contributions, investment returns, and withdrawal/loan activity. The percent change in average account balance of participants in their 20s was heavily influenced by the relative size of their contributions to their account balances and increased at a compound average growth rate of 41.8 percent per year between year-end 2007 and year-end 2012. 401(k) participants tend to concentrate their accounts in equity securities. The asset allocation of the 7.5 million 401(k) plan participants in the consistent group was broadly similar to the asset allocation of the 24.0 million participants in the entire year-end 2012 EBRI/ICI 401(k) database. On average, about three-fifths of 401(k) participants’ assets were invested in equities, either through equity funds, the equity portion of target-date funds, the equity portion of non-target-date balanced funds, or company stock. Younger 401(k) participants tend to have higher concentrations in equities than older 401(k) participants. More consistent 401(k) plan participants held target-date funds at year-end 2012 than at year-end 2007, on net; a third of those with target-date funds held all of their 401(k) account in target-date funds.

Optimizing Retirement Income: An Adaptive Approach Based on Assets and Liabilities

Many retirees’ financial resources are insufficient to sustain their desired expenditures, which makes clear the need for more efficient retirement asset allocation strategies. We propose an approach to retirement investing that directly incorporates spending targets within a multiperiod framework that improves performance with respect to spending sustainability and bequest motives. We propose an “adaptive” model, which is dynamic and allows for recourse decisions and permits changes in asset allocation in response to market outcomes as the retiree ages. Practitioners can use the adaptive model to increase the sustainability of their clients’ spending and the funding of bequests, thereby enhancing their clients’ welfare in their later years. <b>TOPICS:</b>Portfolio construction, performance measurement, retirement

Do Wealth Fluctuations Generate Time-Varying Risk Aversion? Italian Micro-Evidence on Household Asset Allocation

Data from the Italian Survey of Households Income and Wealth (SHIW) are used to study portfolio allocations change in response to fluctuations in wealth. In particular I test for the prediction of models with habit formation that changes in liquid wealth will affect households' risk aversion and risky asset investment. After controlling for the decision to enter and leave the risky asset market, I find, in contrast with other studies (Brunnermeier and Nagel, 2008 and Chiappori and Paiella, 2008), that changes in wealth do help to explain changes in asset allocation.

How Homogeneous Diversification in Balanced Investment Funds Affects Portfolio and Systemic Risk

The last financial crisis sheds dramatically light on the instability threatened by systemic risk. In this regard no common view appears to exist on the definition, the measurement and real impact on financial system. This paper aims to analyze the relation between systemic risk and portfolio diversification, highlighting the differences between heterogeneous and homogeneous diversification. Diversification is generally accepted to be the main tool for reducing idiosyncratic or portfolio-specific financial risk, but the homogeneous diversification produces also effects on systemic risk. The research consists of three steps to investigate how diversification affects the two components of portfolio risk: (i) systematic, and (ii) idiosyncratic risk. Through the impact on the level of portfolios allocation homogeneity, we assess how (iii) the diversification affects systemic risk. The empirical research implements the estimation strategy through balanced investment funds data, examining the change in asset allocation and the impact on the measures of different types of risk. The results suggest that funds' portfolio diversification reduces at the same time the portfolio-specific risk increasing the likelihood of a simultaneous collapse of financial institutions-given that a systemic event occurs.

A critical perspective of pension tax arbitrage

Pension tax arbitrage theory is controversial in that it concludes that defined benefit (DB) pension plans should shift all their assets to bonds. Pension tax arbitrage may occur when a change in asset allocation of a DB pension scheme together with a change in the financing structure of the sponsoring employer firm results in additional tax-based financial returns without increasing the overall financial risk. A share buyback may be financed by an issue of bonds, and the assets of a pension plan (PP) may be shifted from equities to bonds issued by external companies. Tax advantages arise if interest on corporate debt is tax-deductible, while risk neutrality assumes that shifting assets in a DB pension plan from equities to bonds reduces risk to an extent that exactly offsets the increased risk associated with higher corporate gearing. This article considers the practical relevance of the theory of pension tax arbitrage and how to assess the impact of reported financial information on the market capitalisation of the sponsoring companies. Concerns over large and increasing pension fund (PF) deficits have added to the sense of urgency to seek more conclusive evidence of the practical impact of PF asset allocation decisions, including those based on pension tax arbitrage strategies. The main contribution of this article is to develop an insight into pension tax arbitrage in the light of accounting standards, government policy objectives and corporate pension investment policy. Further research is recommended to explain the asset allocation of PPs and in particular the reasons why so few company boards apply pension tax arbitrage strategies, and to assess the value relevance of PP asset allocation information.

Homeownership as a Constraint on Asset Allocation

Personal preferences and financial incentives make homeownership desirable for most families. Once a family purchases a home they find it impractical (costly) to frequently change their ownership of residential real estate. Thus, by deciding how much home to buy, a family constrains their ability to adjust their asset allocation between residential real estate and other assets. To analyze the impact of this constraint on consumption, welfare, and post-retirement wealth, we first investigate an individual’s optimal asset allocation decisions when they are subject to a “homeownership constraint.” Next, we perform a “thought experiment” where we assume the existence of a market where a homeowner can sell, without cost, a fractional interest in their home. Now the housing choice decision does not constrain the individual’s asset allocations. By comparing these two cases, we estimate the differences in post-retirement wealth and the welfare gains potentially realizable if asset allocations were not subject to a homeownership constraint. For realistic parameter values, we find that the homeowner would require a substantial increase in total net worth to achieve the same level of utility as would be achievable if the choice of a home could be separated from the asset allocation decision. The robustness of the analysis is evaluated with respect to the model’s parameters and initial state variables. We find that changes in the values of the constraint (i.e., the value of the home) and the expected real rate of home value appreciation are the only state variables or parameter that is associated with a large change in asset allocation and/or the burden imposed by the housing constraint. This finding suggests the importance of a detailed examination of the impact of inter-regional differences in home prices and expected rates of appreciation on asset allocation and post-retirement wealth.

U.S. Pension Fund Investing in the 1990s

The 1990s represented a bountiful period for the nation?s pension funds, with soaring stock prices, low interest rates, and benign inflation. This article examines the major trends during this period for the 200 largest defined-benefit pension funds. Among the trends are tremendous asset growth, fundamental changes in asset allocation, and the growth of internal equities and indexed funds. Public pension funds grew faster than corporate funds, and internally managed assets fell from 42% to less than 33% of the total base. The current decade should be different, given an uncertain stock market as well as the upside risk of inflation and interest rates. The most significant near-term issue will be substantial cash inflows needed to fund both state and corporate pension funds.

Heterogeneity, Efficiency and Asset Allocation with Endogenous Labor Supply: The Static Case

We study the implications of consumption and labor allocations with ex ante efficiency and possibly ex post inefficiency on international/interregional portfolio diversification. The answers we obtain depend crucially on the market regime relative to unemployment insurance. If there are complete markets for unemployment insurance, changes in asset allocation are small in the presence of ex post inefficiency, but if there are incomplete markets for unemployment insurance, changes in asset allocation can be large. The direction of the asset movement is towards more diversification.