Optimal Collective Investment: The Impact of Sharing Rules, Management Fees and Guarantees

52 Pages Posted: 20 Sep 2018 Last revised: 9 Nov 2020

See all articles by An Chen

An Chen

Ulm University - Institute of Insurance Science

Thai Nguyen

Ulm University - Institute of Insurance Science

Manuel Rach

Ulm University - Institute of Insurance Science

Date Written: November 6, 2020

Abstract

The present paper answers the question of how the well-being of individual investors (e.g. pension beneficiaries) is affected by having their capital invested in a collective fund. To achieve this, we lay out and solve an optimal collective investment problem under a portfolio insurance constraint, whereby heterogeneous risk preferences of individual plan members are considered. We further distinguish between two types of investors, with different willingness to pay management fees, and study the impact of guarantee design, sharing rules and management fees on the individual investors' benefits. To achieve fairness among various investors, careful considerations shall be given to the management fees and the design of the sharing rule. If unfair sharing rules are applied, the unfairness in the pool increases in the long term. A flexible guarantee which consists of both a deterministic and a state-dependent component proves to have a considerable positive impact on the fairness of the collective in comparison to a purely deterministic guarantee.

Keywords: Collective investment problems, guarantee design, risk sharing

JEL Classification: G11, G23

Suggested Citation

Chen, An and Nguyen, Thai and Rach, Manuel, Optimal Collective Investment: The Impact of Sharing Rules, Management Fees and Guarantees (November 6, 2020). Available at SSRN: https://ssrn.com/abstract=3249094 or http://dx.doi.org/10.2139/ssrn.3249094

An Chen

Ulm University - Institute of Insurance Science ( email )

Ulm, 89081
Germany

HOME PAGE: http://www.uni-ulm.de/mawi/ivw/team

Thai Nguyen

Ulm University - Institute of Insurance Science ( email )

Ulm, 89081
Germany

Manuel Rach (Contact Author)

Ulm University - Institute of Insurance Science ( email )

Ulm, 89081
Germany

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