Pension Funds and Drivers of Heterogeneous Investment Strategies

Abstract

We use bias-free data to analyse the investment strategies of pension funds with similar objectives by measuring their factor exposures within equity and fixed income portfolios. We find substantial heterogeneity in these factor exposures reflecting annual return differences of 1.31-2.35 percentage points. Following our mean-variance optimization model, we find that the funding ratio, risk aversion, and liability duration explain 36 percent of this heterogeneity. We attribute the remaining 64 percent to differences in beliefs that pension funds disclose through their contracting of asset management firms. Beliefs therefore have important economic implications for beneficiaries who cannot freely choose a pension fund.

Keywords: factor exposures, liabilities, pension funds, portfolio choice, retirement income

JEL Classification: G11, G23