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Pension Fund Board Composition and Investment Performance: Evidence from Private Equity

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  • Xavier Aleksander Andonov
  • Xavier Yael V. Hochberg
  • Joshua D. Rauh

Abstract

We examine the governance of public pension funds and its relationship to investment performance. Pension fund board composition – most often set by statute many decades earlier – is strongly related to the performance of private equity investments made by the fund. Funds whose boards have high fractions of members who either sit on the board by virtue of their position in state government (ex officio) or were appointed by a state official underperform the most, followed by funds whose boards have a high fraction of members elected by participants. This underperformance is related both to investment category allocation and to selection of managers within category. Funds with worse-performing governance structures invest more in real estate and funds of funds, explaining 20-30% of the performance differential. Poorly governed pension funds also choose poorly within investment categories, overweighting investments in small funds, in-state funds, and in inexperienced GPs with few other investors. Lack of financial experience contributes to poor performance by boards with high fractions of participant elected board members, but does not explain the underperformance of boards heavily populated by state officials. Political contributions from the finance industry to state officials on pension fund boards are strongly and negatively related to performance, but do not fully explain the performance differential.

Suggested Citation

  • Xavier Aleksander Andonov & Xavier Yael V. Hochberg & Joshua D. Rauh, 2016. "Pension Fund Board Composition and Investment Performance: Evidence from Private Equity," Economics Working Papers 16104, Hoover Institution, Stanford University.
  • Handle: RePEc:hoo:wpaper:16104
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • H75 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Government: Health, Education, and Welfare
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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