Daily Academic Alpha: Pension Fund Lemmings

Daily Academic Alpha: Pension Fund Lemmings

April 15, 2015 Uncategorized
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(Last Updated On: January 18, 2017)

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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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. 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.