Working papers
Choosing Pension Fund Investment Consultants
with: Aleksandar Andonov and Irina Stefanescu
Abstract: Pension funds rely on the advisory services of investment consultants for asset allocation decisions, manager selection, and performance benchmarking. While prior research finds that consultants generally do not add value, pension funds have increased the number of investment consultants over time, particularly in alternative assets, such as real assets, private equity and hedge funds. We explore the factors underlying the hiring and firing of consultants and examine whether these decisions are made in the best interests of participants. We find that consultants are more likely to be hired by pension funds with high allocations to alternative assets or having political boards. Pension funds are also more likely to hire consultants that have a discretionary asset management services arm, despite potential agency conflicts. Both hiring and firing depend on past performance, although we find weak evidence that performance improves subsequent to a consultant turnover. Overall, our evidence is consistent with pension funds hiring consultants to shift responsibility rather than improve performance.
Pension Fund Equity Performance: Herding Does Not Payoff
Abstract: I use proprietary data on equity holdings to show that Dutch pension funds herd in individual securities. I introduce a pension fund-level measure of herding that identifies the extent to which a pension fund follows other pension funds into and out of the same securities over time. I show that pension funds that herd underperform pension funds that do not herd by 1.32% on an annual basis that indicates herding has a negative impact on performance. Small pension funds and pension funds that trade less frequently are more likely to herd. These pension funds herd consistently over time, hence they appear to make this decision strategically out of reputational concerns.
Common Advisor Effect in Strategic Asset Allocations
with: Rob Bauer and Dirk Broeders
Abstract: Strategic investment decisions in pension funds are made by trustees. In making these decisions, trustees contract independent advisors such as asset managers and actuaries. Can these external advisors transfer their investment beliefs to the pension funds they contract with? We use proprietary data with the names of asset management firms and individual actuaries that service multiple pension funds to answer this question. We find that pension funds make similar decisions on strategic asset allocations in the presence of a common asset manager or a common actuary, despite significant differences in their liability structures, funding levels, or sizes. The effect is particularly strong in alternative asset classes, such as private equity, hedge funds, and real estate. If two pension funds increase their strategic allocation to alternatives by 10 percentage points in one year, then a third pension fund that contracts the same asset manager increases its strategic allocation to alternatives by 2.5 percentage points, all else being equal. The common-advisor effect might lead a pension fund to select a strategic asset allocation that is not in line with its liability structure, funding ratio, sophistication level, or organizational structure.
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The impact of trustees' age and representation on strategic asset allocations
with: Rob Bauer, Rien Bogman and Dirk Broeders
Abstract: A board of trustees has the fiduciary duty to invest a pension fund’s assets in the best interest of its beneficiaries. Trustees’ characteristics should not affect their investment decisions. We find two counterfactual artefacts for corporate pension funds. First, a higher average board age lowers the strategic allocation to equity by 7 percentage points after controlling for the pension fund’s characteristics. This way the strategic asset allocation does not fully reflect the beneficiaries' characteristics. Second, pension funds with a greater representation of employers on the board allocate more to equities. This fosters a principal-agent problem between employer trustees and beneficiaries.
Work in progress
Climate Scenario Analysis for Central Banks
with: Dirk Broeders, Marleen Schlooz, and Vincent Streichert
Abstract: We develop a methodology for climate scenario analysis to assess the vulnerability of a central bank’s balance sheet to climate change. Our top-down methodology comprises four sequential steps. First, we select climate scenarios from the Network of Central Banks and Supervisors for Greening the Financial System (NGFS). Second, we obtain macroeconomic projections under each scenario from the NiGEM, that are also provided via the NGFS. Third, we disaggregate the macro-level effects into impacts on individual securities using issuer-specific vulnerability factors for both transition risks and physical risks. Fourth, we estimate the impact on profit projections, and on interest rate, credit, and market risk. We apply the scenario analysis to the balance sheet of De Nederlandsche Bank to show that an orderly transition to a low-carbon economy strongly impacts profitability and the interest rate risk in the short term. A disorderly transition or a failure to implement climate policies leads to a significant increase in credit risk and market risk in the long term.