An empirical analysis of the performance of pension funds: evidence from UK

Abstract

Purpose – This paper aims to examine the investment performance of pension funds in the UK using the three standard performance measurement models, the capital asset pricing model (CAPM), Fama-French model and the Carhart model. Design/methodology/approach – The authors use the CAPS-Mellon survey data for the period 1990-2008 and employ the three standard performance measurement models, the CAPM, Fama-French model and the Carhart model in assessing the investment performance of the pension funds. Findings – The authors show that the abnormal returns of pension funds cannot be fully explained by size, book-to-market values, market returns, momentum and the term spread. The authors find larger abnormal returns in bond than in equity portfolios and that smaller funds outperform larger funds. The paper also shows that the addition of the momentum factor does not improve on the three-factor Fama-French model. The authors find that pension funds exhibit superior performance relative to the linear factor models. Research limitations/implications – First, this study contributes to the extant literature on pension funds performance. Future research may also extend the authors' work to incorporate economic, tax, political and legal differences across the countries on the performance of pension funds. Second, due to data constraints, this study excludes the default probability of corporate bonds as an additional variable in their tests on bond returns. Future work may add the default probability as an additional variable whilst examining bond returns. Practical implications – The authors believe that the findings will be considerable food for thought for fund managers who continuously attempt to explore opportunities to provide a higher return to investors. Originality/value – To the authors' knowledge, this is the first comprehensive study that investigates the performance of UK equity and bond pension funds relative to standard linear factor models such as the CAPM, Fama and French, and Carhart.

Trading Volume and Fama-French Three Factor Model on Excess Return. Empirical Evidence from Nairobi Security Exchange

“…Trimech et al (2009) noted the estimated size effect was more pronounced for small portfolios than for big ones. Adami et al(2014) in UK, also found similar results by revealing that the SMB coefficients were all positive indicating that in a given month the small capitalization stocks outperformed the large cap stocks. The size co-efficient values of all the deciles were found to be similar.…”

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“…Disadvantage of many above-mentioned fund studies in CEE is that analysis and comparisons of performance comparison is conducted through Sharpe ratio (Sharpe, 1994), CAPM (Sharpe, 1964), Sortino ratio (Sortino & Van Der Meer, 1991), Jensen's alpha (Jensen, 1968) or Treynor ratio (Treynor, 1965). Recent studies such as those comparing performance of green funds with that of standard funds (Leite & Cortez, 2014;Silva & Cortez, 2016;Marti-Ballester, 2019, or studies focusing on comparative performance of funds in regions other than CEE (Adami et al, 2014;Boubakri et al, 2016;Sha & Gao, 2019) use Fama and French three-factor or five-factor models (Fama & French, 1993, 2015 or Carhart's model (Carhart, 1997). Analysis of funds data from CEE using this methodology would be interesting as well.…”

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“…The returns have been calculated gross of taxes and expenses due to the lack of availability in historical data for expense ratio and managerial fees. The whole sample has then been sorted by historical Assets under Management as indicator of historical size of the investment trust, as performed by Adami et al (2014).…”

“…Lately, Blanco (2012) as well as Bhatnagar and Ramlogan (2012) investigated the empirical failure of CAPM compared with Fama-French Three Factor model, demonstrating the superiority of the multi factor model. Adami et al (2014), applied CAPM, Fama-French three factor and Fama-French Carhart (1997) models evaluating the performances of UK pension funds (1990)(1991)(1992)(1993)(1994)(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008) finding that the models are significant in explaining the abnormal returns and that the Carhart momentum factor did not add significant effect to the model providing significantly greater alpha values. Fama and French (2015), described five risk factors common in the returns on stock and bonds, and among these, three are related to the stock market: firm size, book-to-market equity and overall market; and two are related to the bond market: maturity and default risk (Note 2) and developed the most commonly used performance measurement model, the Fama-French Three (1993) andFive Factor Models (2015).The most recent five-factor model is directed to capture the value, profitability, investment patterns and size in returns, and it has been proved performing better than the Fama-French Three-Factor model (Fama and French, 2015).…”