KCFR Funded Research 2020

Strategic Asset Allocation

(Redouane Elkahmi, U. of Toronto; Jacky S.H. Lee, HOOPP; and Marco Salerno, U. of Toronto)

The views of institutional investors change in response to the macroeconomic landscape, thus impacting portfolio asset allocation. A top challenge for asset managers is overseeing these adjustments empirically with limited risk. This project analyzed the design of a strategic portfolio that is exposed to multiple risk premia and is resilient across multiple economic cycles.

Key findings:

• The authors provide a methodology that incorporates views on the likelihood of economic regimes (e.g., growth and inflation).
• Using data on equities, bonds and commodities, they show both in simulation and empirically that the approach generates stable portfolio weights and a performance that is minimally affected by forecast errors.

Pension Fund Allocations to Private Equity and Portfolio Risk and Return

(Arthur Korteweg, USC and Stavros Panageas, UCLA)

Investing in private equity is becoming more prominent in institutional investing, but performance evaluation is difficult. This work provides a method to evaluate private equity investments by using investor-specific stochastic discount factors. The method allows a direct way of answering the question of whether a given investor could benefit from investing in private equity. The approach is illustrated by focusing on a particular category of investors, public pension plans.

The authors investigate:

• whether pension plans allocated optimal amounts to private equity investments;
• whether the returns of these private equity investments could have been obtained by long-only strategies in publicly traded equities;
• whether the private equity portfolio of pension plans outperformed investment private equity strategies and;
• whether there are governance or other pension plan characteristics that correlate with risk-adjusted private equity performance or simply risk-taking.

Diversity and Inclusion and Portfolio Returns: Is there a trade-off?

(Prashant Bharadwaj, Amanda Bauer, and Frances Lu, UC San Diego)

Pension funds and public investors have re-evaluated the diversity of managers that invest their funds and the firms they invest in. This project focuses on analysis of alternative ways to gain exposure to a D&I factor and the effects of this on portfolio risks and returns. The authors create a new data set on “emerging managers” returns.

Key findings:

• Importance of diversity is justified theoretically and empirically.
• When one cannot target diverse firms directly, emerging manager programs are a way to improve diversity.
• No clear evidence of performance differences; no diversity-returns trade-off.
• Emerging manager programs deliver on diversity goals.