Equity Pension Funds Research Articles

Does team size and tenure matter for European pension funds?

ABSTRACT Pension funds are investment vehicles quite different from mutual funds, because they are specifically designed to provide retirement benefits. We examine the effect of management team size and experience on the ability to capture flows, generate performance (returns and alphas), and risk (value at risk) in a sample of European equity pension funds. To achieve this objective, we resort to cointegration econometric methodology. After analysing the stationarity of the series, we estimate four different proposed relationships to lower the short-run and long-run effects of team size and manager experience on different metrics of pension funds. Our findings reveal a negative short-term effect of team size on pension fund flows and returns, but not on risk-adjusted performance (alpha). Additionally, team size shows a relationship with value at risk (VaR), leading to decreased expected losses as team size increases. Conversely, manager experience positively influences flows in the long run but has negative effects on alpha, not impacting returns.

The environmental, social, and governance (ESG) dimension of firms in which social responsible investment (SRI) and conventional pension funds invest: The mainstream SRI and the ESG inclusion

This study seeks to understand whether the mainstream SRI leads to similar investment decisions in conventional and SRI pension funds. The SRI is expanding beyond specialised SRI funds and increasingly conventional pension funds are integrating firms with certain ESG criteria, in line with legitimacy-theory premises. This phenomenon raises the questions whether SRI and conventional portfolios are converging and whether SRI funds preserve their ethical essence. Using fund holdings and ESG-stock scores, we examine the inclusion level of ESG firms by UK conventional and SRI domestic equity pension funds, taking into account the investment in controversial (socially-sensitive) firms (i.e. related to tobacco, alcohol, or gambling industries, among others). We find that conventional funds consider the firms in which SRI funds invest to integrate ESG criteria. Nonetheless, SRI funds maintain larger ESG-firm standards, preserving the ethical purpose, and larger ESG standards in SRI funds do not affect performance. Our results also show that the ESG integration into conventional funds evolves over time.

The dilemma between fund‐style consistency and active management over the economic cycle. Evidence from pension funds

AbstractThis paper examines whether equity‐allocation shifts (equity‐holding and equity‐style shifts) jeopardize retirement savings in U.K. equity pension funds. Fund‐style shifts may deviate pension funds from their original risk profile and expose participants to undesired results. Nonetheless, these shifts may be the result of an active management to adapt to market cycles. Financial literature usually points out the policy‐allocation importance versus the active management in explaining fund returns; however, we find significant relation between them. Our results show that managers vary their portfolios to add value, avoid the constraints of preserving consistent styles, and adapt to market conditions. Participants do not negatively react to style changes because top shifter funds are run by skillful managers and outperform. Nevertheless, managers must be aware of their limitations and the risk taken with this strategy. Poor skilled managers do not successfully implement style‐shift strategies, especially in crises.

ESG fund scores in UK SRI and conventional pension funds: Are the ESG concerns of the SRI niche affecting the conventional mainstream?

This paper analyses the increasing practice of considering environmental, social, and governance (ESG) factors by conventional pension funds. We study whether the SRI (Social Responsible Investing) concerns are affecting traditional management. In an initial sample of 22 SRI and 221 conventional UK domestic equity pension funds from 2016 to 2018, we apply the nearest-neighbour matching to account for fund-characteristic differences, selecting 20 matched conventional funds. We then analyse the influence of fund characteristics on ESG fund scores, and the ESG-score impact on performance and flows with linear models. Our results show that the ESG scores of conventional and SRI funds are influenced by some common characteristics (age/turnover and expenses negatively/positively influence ESG scores), which are consistent with SRI features. Additionally, a higher ESG screening intensity provides greater return and larger flows. Nonetheless, SRI funds do not lose their identity, positively influencing into ESG scores to a greater extent and outperforming.

Managers beyond borders: side-by-side management in mutual funds and pension funds

Firms of collective investment industries, such as mutual and pension funds, are knowledge-intensive organizations that share managers between their multi-businesses to transfer the know-how of their employees and take advantage of the firm-specific human capital. This paper analyses the determinants and consequences of the simultaneous management (also called side-by-side or SBS management) of mutual and pension funds. In a sample of UK domestic equity mutual and pension funds, we find that managers are more likely to become SBS managers whether they belong to larger firms, have prior experience handling multiple funds, possess higher tenure, are female, and run smaller funds. Furthermore, SBS managers outperform their peers, showing the value of sharing human resources among diversified firms. Our results also show that holding similar portfolios between the funds of a manager may facilitate the multi-fund management. Top performers (SBS and non-SBS) present higher portfolio similarities than bottom performers, and higher fund similarities allow top managers to attract flows between their funds. However, top non-SBS managers erode performance due to higher portfolio similarities.

A strategic fund family business decision: The pension fund liquidation

We study the pension fund liquidation decision from a fund-family perspective. We examine whether fund families liquidate funds based on fund outcomes or as a family strategy. Analysing Spanish equity pension funds, we find that liquidations are not only motivated by fund return, but the fund size and the number of family funds are also significant. Consequently, liquidations are strategic decisions to form families with fewer and larger individual funds, to adapt to market conditions. Furthermore, participants prefer to invest in one family and re-allocate resources to other funds in the same family. Additionally, the managers of liquidated funds who do not manage other family funds are not re-employed within that family. These dismissals are a result of the family restructuring process, rather than being a response to the manager's performance. Finally, we find that, despite the industry concentration, competition is substantial because the Spanish pension fund market is fragmented.

The abilities of managers in UK pension funds. Are socially responsible managers superior?

The abilities of managers in pension funds and, especially, in Socially Responsible (SR) pension funds have only rarely been investigated. Both standard pension funds and specialized SR funds are concerned with social welfare, but SR pension funds present a special interest of study. Various works show that SR managers usually underperform conventional funds because they focus on social aspects, although other studies find that SR funds overperform. In this work, the stock-picking and style timing abilities of UK conventional and SR equity pension fund managers are studied, examining whether SR pension funds implement different strategies and contribute to developing more socially responsible outcomes. Additionally, the influence of SR as a risk factor is introduced. As far as is known, style timing and the introduction of the SR risk factor have not been previously studied in the context of SR pension funds. The results indicate that both kinds of pension fund develop similar investment strategies, investing in small cap and growth values. Moreover, both funds present negative performance, poor/negative stock-picking abilities, and perverse market timing abilities. SR managers exhibit superior style timing skills and are able to correctly time size and book-to-market strategies. The SR risk factor shows that SR pension funds have significantly positive loadings of this factor, which erodes their performance. Overall, none of the funds analyzed develop proper management, and the optimization of the risk-return binomial in SR funds may be constrained by SRI requirements.

Learning about individual managers’ performance in UK pension funds: The importance of specialization

This study examines the performance of managers over time, as well as its persistence, taking into account both manager characteristics and market conditions. Applying parametric and non-parametric methodologies, we examine a sample of UK equity pension fund managers. Our results help to understand the importance of manager assignments in the industry and reveal the importance and benefits of management specialization. We find certain manager performance persistence, revealing that some managers are better than others and possess superior investment skills. Additionally, we find that managers achieve better results when they run a single fund or one investment-objective funds, which allows managers to focus on specific tasks. Nonetheless, manager performance varies with market conditions and highlights managers’ different skills. Specialist managers perform better in bullish markets, and generalists perform better in bearish periods.

An evaluation of Turkish mutual and pension funds performances

This study evaluates the performance of Turkish type-A equity mutual funds and growth equity pension funds for the period between 01.01.2009 and 31.12.2015, using the Sharpe, Sortino, Treynor, Jensen, and Information ratio models, followed by the TOPSIS (Technique for Order Preference by Similarity to Ideal Solution) model, which combines the previously mentioned evaluation techniques to reach to a comprehensive ranking of the funds. In addition, the study tests the ability of fund managers to outperform the market using Jensen’s alpha and Treynor-Mazuy models. In this study, a total of 15 type-A mutual funds and 10 growth equity pension funds have been evaluated and ranked. After using the Jensen’s alpha and Treynor-Muzay models, the results, in general, indicate that the managers of these funds do not possess the ability to outperform the market neither by stock selection nor by market timing. For market timing, only one pension fund has a statistically significant measure implying that its management possesses the ability to time their investments according to their expectations of the future movements of the market. On the other hand, only one mutual fund shows to have outperformed the market by stock selectivity while statistically significant at the 1% level. The study also ranked the mutual and pension funds using the Sharpe, Sortino, Treynor, Information ratio and Jensen models, followed by the TOPSIS model. On the average, pension funds seem to outperform mutual funds when Treynor, Information, and Jensen models are considered. While, when Sharpe and Sortino models are considered, mutual funds seem to outperform pension funds. In addition, it seems that mutual funds outperform pension funds when all measures are combined using the TOPSIS model.

Evaluation of Investment Strategies

The paper is focused on an ex-post investment performance analysis. Firstly, we create a suite of return, risk, return to risk and benchmark related measures with immediate real life applications in mind. We define and describe these measures and provide real data examples where appropriate. Secondly, we take a look at common mistakes performed by practitioners. For each measure, we assess potential misuses and potential misinterpretations of conclusions resulting from them.We also include the visual analysis. Moreover, we analyze advantages and disadvantages of specific measures and show how to use them appropriately. We furthermore stress that it is necessary to evaluate measures in conjunction with each other. We complement the analysis by brief discussion of non-quantifiable, more qualitative, criteria. Lastly, in the practical section, we apply all performance measures and discussed principles in evaluation of the ten years of historical data of the Slovak equity pension funds in the funded pillar.

The importance of domestic equity pension funds on stock market

ABSTRACTThis study examines for the first time the true impact of domestic pension funds investing in equities on the stock market development from a comprehensive perspective. Specifically, we analyse the influence of three pension fund variables (the portions of domestic equity pension funds over total pension funds assets and gross domestic product, and the pension fund return) on market size, liquidity, activity, growth, return and volatility in eight European stock markets, both in the short and long term. Our results show higher influence on the short term than in the long term. Pension funds impact positively on the short- and long-run market size, return and stability. Nonetheless, they only encourage short-term liquidity and activity, evidencing less frequent asset reallocation, consistent with the long-term nature of these instruments.

Pension Fund Herding and the Influence of Management Style

ABSTRACTIn this article, we study the herding phenomenon in Spanish equity pension funds with European investment locations from 2002 to 2012, considering whether the development of different investment strategies by the managers results in herding. In addition, we analyze the performance-herding relationship, observing whether pension fund performance decreases or increases when pension funds herd. Using the herding measure of Lakonishok et al. [1992], we do not find strong imitation behavior, although herding in the market and book-to-market styles are higher. Those pension funds that do not herd or that follow distinctive strategies do not present significant differences in performance with respect to herding funds.

Management fees: Determinants and influence of legal limits. Evidence from Spanish pension funds

Pension funds in Spain have become of considerable importance in recent years. In fact, many studies have focused on fund performance and the adverse impact of fees, although little work has been done on analysis of the determinants of fees. Even though fees are restricted by legal limits in many countries, traditional models do not take these limits into account, and results could be biased; therefore, censored models (such as Tobit or CLAD) may provide a better fit. In this work, we study the determinants of management fees in Spanish equity pension funds. We find a better fit in the CLAD model, which provides unbiased and consistent estimators. Additionally, older and larger pension funds charge greater management fees and these fees increase with low volatility. However, fund returns and market returns barely affect such fees.

An examination of Turkish equity pension funds for selectivity and market timing performance

This paper investigates market timing and selectivity performance of equity pension funds in Turkey over the period of March 2006–February 2011. Single index model is used to test the ability of selecting financial assets correctly and Quadratic Treynor–Mazuy (TM) and Henriksson–Merton (HM) models are used to test the market timing ability of equity pension fund managers. The results of this paper prove that Turkish equity pension fund managers do not have consistent and superior market timing and selectivity abilities over the period of March 2006–February 2011. The results of this study should be of interest to individual investors seeking to maximise value of their pension plans.

Performance Persistence of Spanish Pension Funds: The Best Winners and Losers Usually Repeat

In this paper, we analyse the persistence phenomenon on the returns obtained by Spanish equity pension funds in the period 1999–2006, an unexplored topic in the Spanish financial market, one of the most emerging pension fund industries in the European Union. We provide evidence for a short-run persistence in some of the yearly periods analysed by using a contingency table approach. In this sense, we firstly apply 2 × 2 contingency tables to observe whether the best or worst managed funds repeat in this situation in consecutive years and to check the existence of this phenomenon for the whole investment period analysed. Then, the study improves the methodological approach by using 4 × 4 contingency tables, a research that leads us to interesting results confirming the findings obtained with the previous analysis and determining the pension funds that cause the persistence. On the other hand, this paper also examines the existence of long-run performance persistence obtaining worse results in general. More specifically, a minority of funds show a constant winning (losing) behaviour, presenting important (deficient) management skills.

Identifying differences in the performance persistence of pension plans

This paper examines performance persistence over the period 2001–2005 in the two most important investment categories of the Spanish pension market: fixed-income and equity pension funds. There is a rising trend for research into performance persistence to focus on mutual funds; however, a small number of studies are looking at this issue in relation to pension plans, especially in the Spanish market, one of the most emerging pension fund industries in the European Union. By using a nonparametric approach, clear evidence of persistence phenomenon is found in fixed-income plans, with results indicating that their returns are dependent and thus past returns are a good indicator of future investment decisions. The conclusions regarding equity plans are, however, not so clear.

Pension Funds in Spain, 1991-2006 (Fondos de Pensiones en España, 1991-2006)

During the last 5 years (2001-2006), the average return of the pension funds in Spain (2.9%) was lower than the average inflation (3.2%). Nevertheless, on December 31, 2006, 9.9 million investors in the 2,759 existing pension funds had 81 billion euros. Only 6 of the 115 equity pension funds with 5-year history outperformed the benchmark.

Conditional performance measurement using portfolio weights: evidence for pension funds

Abstract This paper combines the use of portfolio holdings data and conditioning information to create a new performance measure. Our conditional weight-based measure has several advantages. Using conditioning information avoids biases in weight-based measures as discussed by Grinblatt and Titman (J. Business 60 (1993)). When conditioning information is used, returns-based measures face a bias if managers can trade between observation dates. The new measures avoid this interim trading bias. We use the new measures to provide fresh insights about performance in a sample of U.S. equity pension fund managers.

A Panel Study of U.S. Equity Pension Fund Manager Style Performance

A Panel Study of U.S. Equity Pension Fund Manager Style Performance

A Panel Study of U.S. Equity Pension Fund Manager Style Performance

The authors examine the investment performance of 292 U.S. equity pension funds in three major style categories for two consecutive twelve-quarter time periods, including survivors and non-survivors. They offer three major conclusions. First, the choice of an equity benchmark affects the magnitude of alpha. Second, it is difficult to find investment managers within equity styles who consistently add value relative to the S&P 500 and the appropriate style benchmark. Finally, there is no evidence that the number of funds outperforming that appropriate style benchmark index (after fees) exceeds random chance. Including non-survivors and applying selected control variables does not affect the basic results.