Institutionalizing Countercyclical Investment: A Framework for Long-term Asset Owners
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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.
Series:
Working Paper No. 2016/038
Subject:
Asset allocation Asset and liability management Asset management Expenditure Financial institutions Financial sector policy and analysis Financial sector stability Pension spending Stocks
English
Publication Date:
February 29, 2016
ISBN/ISSN:
9781513512495/1018-5941
Stock No:
WPIEA2016038
Pages:
43
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