Pension funds' portfolio choices and investment beliefs

The investment policy of an occupational pension fund is typically expressed by its asset allocation, or the portfolio diversification across various asset classes such as stocks and bonds. Most pension funds disclose information about their asset allocation in their annual reports and on their website. By contrast, much less is known about the choices that pension funds make within their stock and bond portfolios. We study these choices for pension funds in the Netherlands. Ideally information on the holdings in individual stocks and bonds makes it possible to analyse these portfolio choices. Because this information is not readily available for all pension funds, we follow an alternative approach. Our research design is based on analysing the returns that pension funds in the Netherlands report on their stock and bond portfolios. We determine to what extent these portfolio returns are driven by a number of return factors, in particular the market return and the returns on four style factors namely value, momentum, carry and low beta. In doing so we find substantial heterogeneity in these factor exposures showing that pension funds make distinct choices within their stock and bond portfolios. The heterogeneity is sizable and equivalent to a return difference of 1.31-2.35 percentage points on an annual basis. This raises the question of what drives these differences. We find that the funding ratio, risk aversion, and liability duration explain 36 percent of this heterogeneity. We attribute the remaining 64 percent to differences in investment beliefs. Beliefs therefore have important economic implications for the beneficiaries of a pension fund.