Pension Funds in Mexico and Chile: A Risk-Reward Comparison

25 Pages Posted: 8 Apr 2019

See all articles by Hans Schlechter

Hans Schlechter

Pontifical Catholic University of Chile

Bernardo Pagnoncelli

Adolfo Ibanez University - School of Business

Arturo Cifuentes

CLAPES--UC

Date Written: March 20, 2019

Abstract

Mexico and Chile have Defined Contributions (DC) pension systems. In both cases affliates are offered several investment funds with, allegedly, different risk-return profiles. Analyzing actual return data for the April 2008-March 2018 period, and using a number of risk (and return) related metrics, we reach quite different conclusions in relation to such funds. In the case of Mexico, the funds delivered returns according to their intended risk profile, and they are consistently ranked correctly in terms of absolute risk, risk-adjusted returns, and cumulative returns. Chilean funds, on the other hand, exhibited erratic risk-return patterns, with the most conservative fund outperforming the riskiest fund in terms of cumulative returns. Overall our analysis is an indictment on the idea of using asset allocation limits to control portfolio risk (Chile), and supports the view that risk is much better controlled using an overall portfolio-level risk metric (Mexico). Since most pension funds still rely heavily on asset-class limits to manage risk, our results should serve as a serious warning against the danger of relying on this practice.

Keywords: Pension Funds, Defined Contribution, Rank-order Metrics

JEL Classification: H55, G17, G11

Suggested Citation

Schlechter, Hans and Pagnoncelli, Bernardo and Cifuentes, Arturo, Pension Funds in Mexico and Chile: A Risk-Reward Comparison (March 20, 2019). Available at SSRN: https://ssrn.com/abstract=3359920 or http://dx.doi.org/10.2139/ssrn.3359920

Hans Schlechter (Contact Author)

Pontifical Catholic University of Chile ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

Bernardo Pagnoncelli

Adolfo Ibanez University - School of Business ( email )

Balmaceda 1625
Recreo
Vi?a del Mar
Chile

Arturo Cifuentes

CLAPES--UC ( email )

Av Libertador General Bernardo O'Higgins 340
Santiago, Región Metropolitana 8331150
Chile

HOME PAGE: http://https://arturocifuentes.com/

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