The Return Expectations of Institutional Investors
59 Pages Posted: 28 Dec 2017 Last revised: 15 Mar 2019
Date Written: February 1, 2019
Analysis of newly-required disclosures on the expected returns of public pension funds across asset classes reveals that institutional investors rely on past performance in setting return expectations. These extrapolative expectations occur across all risky asset classes, operate through the expected risk premium, and affect target asset allocations. Pension funds with higher unfunded liabilities assume higher returns through higher inflation, but this relation is distinct from the extrapolative effect of past returns. Pension funds are more likely to extrapolate performance when working with certain investment consultants, and when their executives have personally experienced a longer history of performance with the fund.
Keywords: Institutional investors, return expectations, asset allocation, portfolio choice, return extrapolation
JEL Classification: G02, G11, G23, G28, H75, D83, D84
Suggested Citation: Suggested Citation