The Investment Behavior of State Pension Plans

Determinants of equity pension plan flows

“…On the other hand, poor performers plans do not experience significant outflows in their portfolios, which could be due to (1) the presence of cautious clients in the pension plans industry, (2) the existence of a disposition effect and (3) the existence of familiarity bias from which investors prefer to invest in stocks from the domestic market. Congruently with the abovementioned familiarity bias, our results show that pension plans that invest in Spanish stocks receive significantly more inflows than pension plans that invest in European or International stocks, as in Brown et al (2012).…”

“…This absence of a strong link between performance and flows for the poorest performers could be attributable to (1) the presence of cautious clients in the pension plan industry who may invest in consideration of other factors such as fiscal benefits and promotional gifts, among others, (2) the existence of a disposition effect whereby investors do not sell funds that perform poorly, staying invested in the hope that the fund price returns to the original purchase price (Shefrin and Statman (1985)) or in the belief that mutual fund perceived past performance is above actual past performance, from which investors tend to adjust their beliefs to justify their past purchase in order to resolve the discrepancy between performance and past purchase Peles, 1997 andChen andLai, 2010) and/or (3) the existence of familiarity bias as found by Brown et al (2012), from which investors tend to invest in pension plans that invest in sectors or stocks from Spain, without taking into account their risk-return binomial.…”

“…This finding may be due to investors of pension plans managed by insurance companies (1) treating all plans within an investment style as equally risky, as shown by Fant and O'Neal (2000) or (2) not knowing that they are taking a risk when they invest their wealth in a specific equity pension plan or (3) not having been informed about the risk and systematic risk of their pension plans or (4) suffer from familiarity bias as found by Brown et al (2012), tending to invest in pension plans that invest in sectors or stocks from Spain, without taking their risk into accountor (5) tending to prioritize return without taking the risk into account, since the Spanish pay-as-you-go social security system will provide them with a minimum retirement pension when they retire, causing a moral hazard behavior.…”

“…Brown et al (2012) analyze the investment behavior of US defined benefit state pension plans that actively manage their equity portfolios implementing ordinary least square (OLS) regression. Their results show that states are able to generate excess returns through their in-state investment activities.…”

“…The investors could have preferences for pension plans that invest in domestic stocks, with domestic pension plans receiving more money entries than pension plans whose assetsare invested in international stocks, as shown by Brown et al (2012). For this reason, we introduce the FLOWSPAIN variable in our model, which represents the growth of plans whose assets are mainly invested in domestic stocks in month t. The FLOWEUROPE variable represents the growth of plans whose assets are mainly invested in European stocks in month t and the FLOWINTER variable represents the growth of plans whose assets are mainly invested in international stocks in month t.…”