CAN ASSET ALLOCATION LIMITS DETERMINE PORTFOLIO RISK-RETURN PROFILES IN DC PENSION SCHEMES?

ABSTRACTThe asset allocation is a crucial decision for pension funds, and this paper analyses the economic factors which determine this choice. The analysis proceeds on the basis that, in the absence of taxation, risk sharing and default insurance, the asset allocation between equities and bonds is indeterminate and governed by the risk/return preferences of the trustees and the employer. If the employing company and its shareholders are subject to taxation, there is a tax advantage in a largely bond allocation. Risk sharing between the employer and the employees often means that one group favours a high equity allocation, while the other favours a low equity allocation. Underpriced default insurance creates an incentive for a high equity allocation. When taxation, risk sharing and underpriced default insurance are all present, it is concluded that the appropriate asset allocation varies with the circumstances of the scheme; but that a high equity allocation is probably inappropriate for many private sector pension schemes.

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Macro Asset Allocation with Social Impact Investments

Sustainability ◽

10.3390/su11113140 ◽

2019 ◽

Vol 11 (11) ◽

pp. 3140 ◽

Cited By ~ 3

Author(s):

Massimo Biasin ◽

Roy Cerqueti ◽

Emanuela Giacomini ◽

Nicoletta Marinelli ◽

Anna Grazia Quaranta ◽

...

Keyword(s):

Risk Aversion ◽

Asset Allocation ◽

Social Impact ◽

Large Fraction ◽

Stock Index ◽

Portfolio Risk ◽

Risk Return ◽

Mean Variance ◽

Different Levels ◽

Unique Dataset

Using a unique dataset of 50 listed companies that meet the majority of the OECD requirements for social impact investments, we construct a social impact finance stock index and investigate how investing in social impact firms can contribute to portfolio risk-return performance. We build portfolios with three different methodologies (naïve, Markowitz mean-variance optimization, GARCH-copula model), and we study the performance in terms of returns, Sharpe ratio, utility, and forecast premium based on a constant relative risk aversion function for investors with different levels of risk aversion. Consistent with the idea that social impact investment can improve portfolio risk-return performance, the results of our macro asset allocation analysis show the importance of a large fraction of investor portfolios’ stake committed to social impact investments.

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A new asset allocation technique to reduce financial portfolio risk

Journal of Asset Management ◽

10.1057/jam.2011.22 ◽

2011 ◽

Vol 12 (6) ◽

pp. 418-425

Author(s):

Gino Gandolfi ◽

Antonella Sabatini ◽

Monica Rossolini

Keyword(s):

Asset Allocation ◽

Portfolio Risk ◽

Financial Portfolio

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The cult of the equity for pension funds: should it get the boot?

Journal of Pension Economics and Finance ◽

10.1017/s1474747204001726 ◽

2005 ◽

Vol 4 (1) ◽

pp. 57-85 ◽

Cited By ~ 16

Author(s):

CHARLES SUTCLIFFE

Keyword(s):

Asset Allocation ◽

Risk Sharing ◽

Pension Scheme ◽

Defined Benefit ◽

Turn Of The Millennium ◽

Equity Prices ◽

Risk Return ◽

History Of ◽

Complete Rejection ◽

The Uk

Over the last half century UK defined benefit pension schemes have followed the cult of the equity by investing a large proportion of their assets in equities. However, since the turn of the millennium this cult has faced two serious challenges – the halving of equity prices, and the complete rejection of equity investment by the Boots pension scheme in 2001. This paper summarises the history of the cult in the UK and the arguments advanced at the time to support its adoption. It then presents the case for the cult (excluding taxation, risk sharing and default insurance). This is followed by a detailed consideration of the validity of this case, including an examination of the relevant empirical evidence. It is concluded that, in the absence of taxation, risk sharing and default insurance, the asset allocation is indeterminate; and depends on the risk-return preferences adopted by the trustees.

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Landmark buildings and diversification opportunities in the residential market

International Journal of Housing Markets and Analysis ◽

10.1108/ijhma-08-2015-0051 ◽

2016 ◽

Vol 9 (4) ◽

pp. 429-445 ◽

Cited By ~ 1

Author(s):

Lucia Gibilaro ◽

Gianluca Mattarocci

Keyword(s):

Asset Allocation ◽

Time Horizon ◽

Efficient Frontier ◽

Diversification Strategy ◽

Content Type ◽

Risk Return ◽

Good Investment ◽

Asset Class ◽

Housing Investments

Purpose This article aims to analyze the performance and risk of landmark building in the housing sector and to evaluate their usefulness for a diversification strategy. Design/methodology/approach After comparing summary statistics on the performance of landmark building with respect to other types of housing investments, the article evaluates their usefulness for a diversification strategy. The role of landmark buildings is studied using the modern portfolio theory and evaluating the role of this type of asset in the optimal asset allocation. The analysis is performed considering both the risk/return trade-off in a one-year and a multiple-year time horizon. Findings The results show that a landmark building can be a good investment opportunity, especially for high-risk/return investors. A not perfect correlation of the returns of this asset class with other types of housing investments implies the existence of a minimum investment in this asset class for almost all portfolios on the efficient frontier. Results are robust with respect to the length of the investment time horizon. Originality/value The article presents a unique analysis of intra-housing market diversification opportunities focusing on the role of landmark building in the portfolio construction. Empirical evidence supports the hypothesis that real estate investors can take advantage of investing in landmark buildings in the residential sector as well because there are no reasons to limit such investments to trophy buildings in the office and commercial sectors.

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A Fund-Based Timberland Investment Performance Measure and Implications for Asset Allocation

Southern Journal of Applied Forestry ◽

10.1093/sjaf/22.3.143 ◽

1998 ◽

Vol 22 (3) ◽

pp. 143-147 ◽

Cited By ~ 8

Author(s):

Jon P. Caulfield

Keyword(s):

Asset Allocation ◽

Institutional Investors ◽

Performance Index ◽

Historical Record ◽

Performance Measure ◽

Investment Management ◽

Investment Performance ◽

Risk Return ◽

Asset Value ◽

Investment Management Companies

Abstract Timberland investment management companies and institutional investors use indexes to calculate the performance of timberland investments. Most indexes are based on hypothetical timberland properties. The Timberland Performance Index (TPI), a fund-based performance measure, provides composite returns for actual, institutionally owned timberlands. The TPI has several desirable attributes: it uses publicly available data from real properties, is weighted by asset value, has a sufficiently long historical record that meaningful comparisons can be made with other assets, and can be updated quarterly. The TPI is employed to demonstrate how adding timberland to a portfolio influences risk-return relationships for institutional portfolios. For the 1981-1996 period it is found that adding timberland tends to enhance returns for given levels of risk. This is consistent with previous research, which employed hypothetical timberland indexes for this purpose. South. J. Appl. For. 22(3):143-147.

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Timberland Indexes and Portfolio Management

Southern Journal of Applied Forestry ◽

10.1093/sjaf/14.3.119 ◽

1990 ◽

Vol 14 (3) ◽

pp. 119-124 ◽

Cited By ~ 1

Author(s):

F. Christian Zinkhan ◽

Kossuth Mitchell

Keyword(s):

Performance Evaluation ◽

Portfolio Management ◽

Asset Allocation ◽

Financial Assets ◽

Southern Pine ◽

Investment Performance ◽

Risk Return ◽

Efficient Portfolios ◽

The Mean ◽

Mean Risk

Abstract This paper explores two timberland index applications: asset allocation and investment performance evaluation. The Southern Timberland Index Fund (STIF), a southern pine index fund, is adopted for use in these applications. In the asset allocation application, the mean risk of risk-return efficient portfolios containing financial assets and the STIF is discovered to be 43% less than the mean risk of the efficient portfolios containing only financial assets. Efficient portfolios contain the STIF in proportions as high as almost 30%. As far as performance is concerned, a timberland index is suggested for use as a benchmark for evaluating (1) timberland investment managers and (2) the investment performance of timberland versus other investment alternatives. Before such applications become commonplace, it is concluded that problems associated with existing timberland indexes be addressed. South. J. Appl. For. 14(3):119-124.

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The investment attributes of Mexico REITs as a listed property investment vehicle

Journal of Property Investment and Finance ◽

10.1108/jpif-05-2020-0048 ◽

2020 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Muhammad Jufri Marzuki ◽

Graeme Newell

Keyword(s):

Latin American ◽

Emerging Economies ◽

Portfolio Optimisation ◽

Portfolio Risk ◽

Property Market ◽

Content Type ◽

Risk Return ◽

Latin American Region ◽

The World ◽

Asset Portfolio

PurposeMexico REITs are a significant and important REIT market, both in a regional and in emerging property market context. As one of the few emerging economies in the world with an active REIT market, Mexico REITs are specifically designed to provide an effective pathway to participate in the investment opportunities offered by the Mexico commercial property market for both domestic and international investors. Importantly, Mexico REITs provide additional property investment benefits such as a high degree of transparency, governance and liquidity. The main focus of this research is to highlight the significance of Mexico REITs and assess their performance dynamics, as well as the added-value benefits of Mexico REITs in mixed-asset investment portfolios.Design/methodology/approachUsing monthly total returns, the risk-adjusted performance and portfolio diversification potential of Mexico REITs over April 2011–December 2019 were assessed. A constrained mean-variance portfolio optimisation framework was used to develop a three-asset portfolio scenario using the historical returns, risk and correlation of Mexico REITs and the other two major financial assets.FindingsDespite being more volatile than the mainstream asset classes, Mexico REITs delivered the strongest risk-adjusted performance versus stocks and bonds over April 2011–December 2019, which was made possible by the high premium of their total return performance. Notably, Mexico REITs offered excellent diversification potential with bonds, whilst demonstrating a marginal positive correlation with the stock market. These investment attributes of Mexico REITs have brought immediate benefits towards their ability to add value to the Mexico mixed-asset portfolio fabric across a wide portfolio risk–return spectrum.Practical implicationsWhilst their initial establishment in 2004 was considered unsuccessful, the ongoing regulatory improvements have been pivotal in providing a supportive investment environment to nurture the organic growth of Mexico REITs. This now sees the Mexico REIT market as an exemplar of success for REIT establishments amongst its peers in the Latin American region, as well as for emerging economies worldwide. Mexico REITs are now an important REIT market, as the second largest emerging REIT market in the world. The empirical investigation of this research has established the investment attributes of Mexico REITs as a listed property investment vehicle. The strong risk-adjusted performance of Mexico REITs compared to stocks and bonds sees Mexico REITs contributing to the mixed-asset portfolio across the portfolio risk–return spectrum. This is particularly important as it provides insights into the broader strategic implications of Mexico REITs as an effective, transparent and tax-efficient conduit for high-quality Latin American property exposure in a liquid format.Originality/valueThis paper is the first published empirical research that elucidates the investment attributes of Mexico REITs, highlighting their significance, risk-adjusted and portfolio performance enhancement role as an emerging REIT market. The main outcome of this research enables empirically validated, more informed and practical property investment decision-making regarding the strategic role of Mexico REITs in an investment portfolio.

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