Investment performance, regulation and incentives: the case of Chilean pension funds

Abstract

We examine the investment performance of Chilean pension funds during their multi-fund period (2003–17). Using tradable asset class benchmarks, we extend Sharpe's (1992) return-based style analysis by explicitly considering regulatory restrictions and currency hedging. We find that despite the significant differences between pension fund manager returns, they are statistically similar to our style benchmarks for all fund types. Furthermore, accounting for currency hedging improves the accuracy of the replicating portfolios and the selection return estimates. Our results have policy implications for investment regulation of pension systems with similar characteristics to the Chilean one.

Navigating the Public Pension Landscape: An Examination of Asset Allocations

“…The spread of information could include changes in rules and regulations regarding pension investment, changes in asset allocation or rebalancing strategies, and/or market signals such as the returns on different asset types. Since pension plans are likely to face the same legal and market challenges or targeted benchmarks when making investment decisions (Olivares, 2008;Bravo & Ruiz, 2015;López & Walker, 2021), their investment decisions can be unintentionally influenced by the trading or portfolio management of others (Bikhchandani & Sharma, 2000;Rauh, 2006;Blake et al, 1999). Like the peer effect in the mutual fund industry, pension investment trustees and fund managers may watch the allocation of other larger and more influential plans and mimic their investment choices (Chevalier & Ellison, 1999;Sirri & Tufano, 1998;Mohan & Zhang, 2014).…”