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Can Large Pension Funds Beat the Market? Asset Allocation, Market Timing, Security Selection and the Limits of Liquidity

Aleksandar Andonov

Maastricht University

Rob Bauer

Maastricht University

Martijn Cremers

University of Notre Dame

October 2012

We analyze the three components of active management (asset allocation, market timing and security selection) in the net performance of U.S. pension funds and relate these to fund size and the liquidity of the investments. On average, the funds in our sample have an annual net alpha of 89 basis points that is evenly distributed across the asset allocation, market timing, and security selection components. Stock momentum fully explains the positive alpha in security selection, whereas “time series momentum” drives market timing. While larger pension funds have lower investment costs, this does not lead to better net performance. Rather, all three components of active management exhibit substantial diseconomies of scale directly related to illiquidity. Our results suggest that especially the larger pension funds would have done better if they invested more in passive mandates without frequent rebalancing across asset classes.

Number of Pages in PDF File: 48

Keywords: pension fund performance, asset allocation, market timing, security selection, dis-economies of scale, liquidity.

JEL Classification: G11, G23

working papers series

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Date posted: July 14, 2011 ; Last revised: November 15, 2012

Suggested Citation

Andonov, Aleksandar and Bauer, Rob and Cremers, Martijn, Can Large Pension Funds Beat the Market? Asset Allocation, Market Timing, Security Selection and the Limits of Liquidity (October 2012). Available at SSRN: http://ssrn.com/abstract=1885536 or http://dx.doi.org/10.2139/ssrn.1885536

Contact Information

Aleksandar Andonov
Maastricht University ( email )
Maastricht, 6200 MD
HOME PAGE: http://www.aleksandarandonov.com/
Rob Bauer
Maastricht University ( email )
P.O. Box 616
Maastricht, 6200 MD
+31 43 3883871 (Phone)
K. J. Martijn Cremers (Contact Author)
University of Notre Dame ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
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References:  44
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