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Rehabilitating the role of active management for pension funds

  • Aglietta, Michel
  • Brière, Marie
  • Rigot, Sandra
  • Signori, Ombretta

Pension fund returns can be decomposed into different sources, including market movements, asset allocation policy, and active portfolio management. We use a unique database covering the asset allocations of US defined-benefit pension funds for the period 1990–2008, and we test the role of each factor in explaining their returns. Our results shed new light on pension funds’ sources of performance. While the previous literature emphasized that policy allocation accounts for the bulk of returns, leaving little room for active management, we show that taking explicit account of market movement can change the results significantly. Although active management plays a minor role in global asset allocation, its role is predominant in explaining returns to individual asset classes, whether traditional or alternative. This paper rehabilitates the contribution of active management as a source of performance for pension funds, at least at the asset class level.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 36 (2012)
Issue (Month): 9 ()
Pages: 2565-2574

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Handle: RePEc:eee:jbfina:v:36:y:2012:i:9:p:2565-2574
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. George Pennacchi & Mahdi Rastad, 2010. "Portfolio Allocation for Public Pension Funds," NBER Working Papers 16456, National Bureau of Economic Research, Inc.
  2. Ralph S. J. Koijen & Theo E. Nijman & Bas J. M. Werker, 2010. "When Can Life Cycle Investors Benefit from Time-Varying Bond Risk Premia?," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 741-780, February.
  3. Brière, Marie & Signori, Ombretta, 2009. "Do Inflation-Linked Bonds Still Diversify ?," Economics Papers from University Paris Dauphine 123456789/7741, Paris Dauphine University.
  4. John H. Cochrane & Monika Piazzesi, 2005. "Bond Risk Premia," American Economic Review, American Economic Association, vol. 95(1), pages 138-160, March.
  5. Marie Briere & Ariane Szafarz, 2007. "Crisis-Robust Bond Portfolios," Working Papers CEB 07-030.RS, ULB -- Universite Libre de Bruxelles.
  6. Leo de Haan & Jan Kakes, 2010. "Momentum or Contrarian Investment Strategies:Evidence from Dutch institutional investors," DNB Working Papers 242, Netherlands Central Bank, Research Department.
  7. Hyde, Stuart J & Bredin, Don P & Nguyen, Nghia, 2007. "Correlation dynamics between Asia-Pacific, EU and US stock returns," MPRA Paper 9681, University Library of Munich, Germany.
  8. Kenneth R. French, 2008. "Presidential Address: The Cost of Active Investing," Journal of Finance, American Finance Association, vol. 63(4), pages 1537-1573, 08.
  9. Bauer, R.M.M.J. & Cremers, K.J.M. & Frehen, R.G.P., 2010. "Pension Fund Performance and Costs: Small is Beautiful," MPRA Paper 23556, University Library of Munich, Germany.
  10. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March.
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