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.
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.
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.
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.
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.
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.
The authors thank Gulnur Muradoglu for her helpful comments for earlier versions of this paper. The authors would also like to thank Andrew Oxley of CAPS-Mellon for the data. The authors alone are responsible for all limitations and errors that may relate to the paper.
Adami, R., Gough, O., Mukherjee, S. and Sivaprasad, S. (2014), "An empirical analysis of the performance of pension funds: evidence from UK", Studies in Economics and Finance, Vol. 31 No. 2, pp. 141-155. https://doi.org/10.1108/SEF-10-2012-0118
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