Daily Academic Alpha: Pension Fund Lemmings

Daily Academic Alpha: Pension Fund Lemmings

April 15, 2015 Uncategorized

Last updated on January 18th, 2017 at 02:33 pm

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The Market for Lemmings: Is the Investment Behavior of Pension Funds Stabilizing or Destabilizing?

Pension funds are large institutional investors, and yet very little is known about their investment behavior. Using a unique dataset that covers UK defined-benefit pension funds’ asset allocations over the past 25 years, we show that pension funds display strong herding behavior when moving in and out of different asset classes and they herd in subgroups (defined by size and sector type), consistent with the notion of ‘reputational’ herding. We also find that pension funds mechanically rebalance their portfolios in the short term in response to valuation changes, and they systemically switch from equities to bonds as their liabilities mature. Furthermore, the median fund is an index matcher, hence failing to earn a long-run liquidity premium. Thus pension funds do not play the stabilizing role one would expect from long-term investors.


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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.