Institutionalizing Countercyclical Investment: A Framework for Long-term Asset Owners

February 29, 2016

Preview Citation

Format: Chicago

Bradley Jones. Institutionalizing Countercyclical Investment: A Framework for Long-term Asset Owners, (USA: International Monetary Fund, 2016) accessed December 22, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Do portfolio shifts by the world’s largest asset owners respond procyclically to past returns, or countercyclically to valuations? And if countercyclical investment (with both market-stabilizing and return-generating properties) is a public and private good, how might asset owners be empowered to do more of it? These two questions motivate this study. Based on analysis of representative portfolios (totaling $24 trillion) for a range of asset owners (central banks, pension funds, insurers and endowments), portfolio changes typically appear procyclical. In response, I suggest a framework aimed at jointly bolstering long-term returns and financial stability should: (i) embed governance practices to mitigate ‘multi-year return chasing;’ (ii) rebalance to benchmarks with factor exposures best suited to long-term investors; (iii) minimize principal-agent frictions; (iv) calibrate risk management to minimize long-term shortfall risk (not short-term price volatility); and (v) ensure regulatory conventions do not amplify procyclicality at the worst possible times.

Subject: Asset allocation, Asset and liability management, Asset management, Expenditure, Financial institutions, Financial sector policy and analysis, Financial sector stability, Pension spending, Stocks

Keywords: Asset, Asset Allocation, Asset class, Asset management, Asset owner, Asset Owners, Fair value, Financial sector stability, Financial Stability, Fixed income, Global, Momentum, Pension spending, Private equity, Return, Risk Management, Stocks, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2016/038
Stock No:

WPIEA2016038
ISBN:

9781513512495
ISSN:

1018-5941

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