Modern Pension Fund Diversification

16 Pages Posted: 19 Apr 2014 Last revised: 2 Jul 2014

See all articles by Marty Anderson

Marty Anderson

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Shan Chen

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

James Hacking

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Mark Lundin

Charles Schwab Investment Management

Vaida Maleckaite

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Ryan Parham

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Mark Steed

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust

Marc Lieberman

Kutak Rock, LLP

Allan Martin

Independent

Date Written: April 18, 2014

Abstract

The risk and return characteristics of a highly diversified investment portfolio are examined in an effort to best assess its potential by means that incorporate both conventional risk estimation and performance evaluation. Estimation of performance variability and downside risk often assumes a constant, stable, average covariance matrix of asset returns and only provides an indirect gauge of capacity for the downside compensation interplay between assets. Performance measurement allows for final conclusions to be drawn, but does not capture the structural characteristics leading to results, nor does it make a distinction between chance occurrence and structural bias. The Mahalanobis distance is employed in order to quantify both aspects simultaneously and document a contemporary shift in advanced pension trust management. The asset liability structures of pension trusts allow for unusually long time-horizons and managing agencies typically possess the resources necessary to select and maintain opaquely priced investments in a controlled fashion. A particular pension fund history, involving a period of transition from a conventional, strictly US-based mix of stocks, bonds, real estate and cash, to a more diversified set of eight additional asset classes, allows for discussion of first results and assessment of the trend towards diversification.

Keywords: Mahalanobis distance, turbulence index, diversification, asset allocation, pension fund, risk, volatility

JEL Classification: C1, C2, C4, C6, G1, G2

Suggested Citation

Anderson, Marty and Chen, Shan and Hacking, James and Lundin, Mark and Maleckaite, Vaida and Parham, Ryan and Steed, Mark and Lieberman, Marc and Martin, Allan, Modern Pension Fund Diversification (April 18, 2014). Available at SSRN: https://ssrn.com/abstract=2426593 or http://dx.doi.org/10.2139/ssrn.2426593

Marty Anderson

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Shan Chen

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

James Hacking

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Mark Lundin (Contact Author)

Charles Schwab Investment Management ( email )

9825 Schwab Way
Lone Tree, CO 80124
United States

HOME PAGE: http://www.schwab.com/

Vaida Maleckaite

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Ryan Parham

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Mark Steed

Government of Arizona - Arizona Public Service Personnel Retirement System (PSPRS) Trust ( email )

3010 E. Camelback Road
Suite 200
Phoenix, AZ 85016
United States

Marc Lieberman

Kutak Rock, LLP ( email )

Allan Martin

Independent ( email )

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