By |Published On: April 15th, 2015|Categories: Uncategorized|

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 Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia 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 firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.

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For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Third party information may become outdated or otherwise superseded without notice.  Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency has approved, determined the accuracy, or confirmed the adequacy of this article.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).

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