Pension Funds and Drivers of Heterogeneous Investment Strategies

We find remarkable heterogeneity in the investment strategies of pension funds with similar objectives. We use bias-free data to measure their investment strategies through factor exposures within equity and fixed income portfolios. Consistent with our model we find that the funding ratio, risk aversion, and liability duration partially explain heterogeneity in factor exposures. The remaining heterogeneity reflects an annual expected return difference of 0.70-1.50 percentage points that we attribute to differences in beliefs that pension funds reveal through contracting asset management firms. This finding shows that beliefs have important economic implications for beneficiaries who cannot freely choose a pension fund.