How do pension funds adjust their portfolios over time? Not all that well according to new research by a team of academics at Maastricht University. In a paper called “Asset Allocation Dynamics of Pension Funds,” Dennis Bams, Peter Schotman, and Mukul Tyagi seek to investigate asset allocation decisions of pension funds over a span of 20 years. They find that changes in equity weightings are largely related to passive changes in the portfolio as pension funds realize equity gains.
At the same time, pension funds are not investing countercyclically in line with their long investment horizons. Rather the authors find pension rebalancing behaviour to be inconsistent over time, as they note: “Pension funds tend to rebalance considerably less following a year with a good stock market performance. This “moving with the market” and behaving procyclically can be detrimental both to their own performance and for the stability of the financial system.”
The authors also find that strategic changes in asset allocations are often slow to filter down into investment decisions in the investment portfolio — and that external managers and active managers “can be identified as the major source of poor rebalancing.” Finally, pension funds tend to be more passive in alternative investments.
Download and read the full paper here.