Portfolio Management for Insurers and Pension Funds and COVID-19: Targeting Volatility for Equity, Balanced and Target-Date Funds with Leverage Constraints

38 Pages Posted: 27 Jan 2021

See all articles by Bao Huy Doan

Bao Huy Doan

University of New South Wales

Jonathan J. Reeves

UNSW Business School, University of New South Wales; Financial Research Network (FIRN)

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies; UNSW Business School

Date Written: January 26, 2021

Abstract

Insurers and pension funds face the challenges of historically low interest rates and volatility in equity markets, that have been accentuated due to the COVID-19 pandemic. Recent advances in equity portfolio management with a target volatility have been shown to deliver improved on average risk adjusted return, after transaction costs. This paper studies these targeted volatility portfolios in applications to equity, balanced and target-date funds with varying constraints on leverage. Conservative leverage constraints are particularly relevant to pension funds and insurance companies, with more aggressive leverage levels appropriate for alternative investments. We show substantial improvements in fund performance for differing leverage levels and that the return per unit of risk is not significantly impacted by the leverage constraint. Of most interest to insurers and pensions funds, we show that the highest return per unit of risk is in targeted volatility balanced portfolios with equity and bond allocations. Furthermore, we demonstrate the outperformance of targeted volatility portfolios during major stock market crashes, including the crash from the COVID-19 pandemic.

Keywords: COVID-19 pandemic, Equity investment, Portfolio management, Target-date funds, Volatility management

JEL Classification: C53, G17

Suggested Citation

Doan, Bao Huy and Reeves, Jonathan J. and Sherris, Michael, Portfolio Management for Insurers and Pension Funds and COVID-19: Targeting Volatility for Equity, Balanced and Target-Date Funds with Leverage Constraints (January 26, 2021). Available at SSRN: https://ssrn.com/abstract=3773495 or http://dx.doi.org/10.2139/ssrn.3773495

Bao Huy Doan

University of New South Wales ( email )

Sydney, NSW 2052
Australia

Jonathan J. Reeves (Contact Author)

UNSW Business School, University of New South Wales ( email )

Sydney, NSW 2052
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Michael Sherris

University of New South Wales - ARC Centre of Excellence in Population Ageing Research and School of Risk and Actuarial Studies ( email )

UNSW Business School
Risk and Actuarial Studies
Sydney, NSW 2052
Australia
+61 2 9385 2333 (Phone)
+61 2 9385 1883 (Fax)

HOME PAGE: http://www.asb.unsw.edu.au/schools/Pages/MichaelSherris.aspx

UNSW Business School ( email )

Sydney, NSW 2052
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
58
Abstract Views
441
rank
426,007
PlumX Metrics