Chapter 26 return based style analysis applied to spanish balanced pension plans

CHAPTER 26 Return-Based Style Analysis Applied to Spanish Balanced Pension Plans Laura Andreu, Cristina Ortiz, José Luis Sarto, and Luis Vicente CONTENTS 26.1 I ntroduction 26.2 D ata 26.3 M ethodology 26.4 Em pirical Results 26.4.1 Definition of the Basic Asset Classes and Study of the Multicollinearity 26.4.2 Importance of Asset Allocation on the Variability of Returns over Time 26.4.3 Importance of Asset Allocation on the Variability in Returns among Plans 26.4.4 Importance of Asset Allocation on the Level of Return 26.5 Summary and Conclusions Appendix References 690 692 693 695 695 695 697 699 701 02 05 689 © 2010 by Taylor and Francis Group, LLC 690 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling T his ch a pter i den tifi es t he investment style carried out by Spanish balanced pension plans during the period 2000–2007 For this reason, we analyze the multicollinearity between different benchmarks in order to choose the best style model Once we have selected the best model to explain the returns obtained by e ach ba lanced p lan, w e de termine t he i mportance o f t hese st rategic allocations to explain the differences on the performance of portfolios In this sense, we try to determine how much of the variability of returns over time is explained by asset allocation, how much of the variation in returns among plans is explained by the differences in the strategic policies, and the proportion of return t hat is explained by asset a llocation Moreover, we carry out some additional analyses to test the incidence of some wellknown biases such as survivorship bias and look-ahead bias on the importance of the strategic asset allocation Consistent w ith p revious l iterature, w e find t hat st rategic po licy explains, o n a verage, abo ut 0% o f t he va riability o f r eturns o ver t ime, more than 40% of the variation in returns among plans, and about 100% of the total return obtained 26.1 INTRODUCTION Investors have a wide variety of portfolios and investment vocations to choose from when it comes to deciding the appropriate pension plan to invest in This chapter tries to shed some light for investors to make this important decision while focusing on the analysis of the investment styles of each portfolio Given that some previous papers* have documented misclassification problems and even the names of some portfolios could be misleading, the analysis of the style allocations of these portfolios becomes of particular interest In this sense, studies such as Brown and Goetzmann (1997) show that up to 40% of mutual funds is misclassified Chan et al (2002) highlight that the increasing attention to the portfolio investment style is justified since it provides a clear evidence of manager skills and portfolio risks In this study, we estimate the style allocations of Spanish balanced pension plans and the influence of these assignments on the performance of each portfolio In th is c ontext, although financial l iterature s u sually f ocused o n equity po rtfolios, t his st udy a nalyzes ba lanced p lans g iven t hat t his * See G ruber (1996), Bro wn a nd G oetzmann (1997), D iBartolomeo a nd Wit kowski (1997), Chan et al (2002), and Swinkels and Van der Sluis (2006), among others © 2010 by Taylor and Francis Group, LLC RBSA Applied to Spanish Balanced Pension Plans ◾ 691 category presents a broader leeway to managers.* Furthermore, this vocation i s v ery r elevant i n t he S panish pens ion i ndustry, wh ere t here were 197 equity balanced pension plans with a market value of more than €7400 billion, and 1.2 million investors at the end of 2007 In general, financial l iterature s emphasized t he i mportance of t he asset allocation analysis on the portfolio performance However, we find some disagreement over the exact relationship since the seminal papers of Brinson et al (1986, 1991) These authors state that more than 90% of the variability of the returns obtained over time is determined by the variation of the strategic policy However, these findings have often been misinterpreted by academics and professional investors, causing a controversy that stems f rom using t he same results to a nswer d ifferent questions In t his sense, the study of Ibbotson and Kaplan (2000) clarifies this controversy, addressing d ifferent questions a nd providing e vidence t hat a sset a llocation explains about 90% of the variability of U.S mutual fund returns over time, more than 40% of the variation of returns among funds, and almost 100% of the total return obtained by the portfolios In this study, we apply the so-called return-based style analysis (RBSA) introduced by Sharpe (1988, 1992) This methodology compares the return of a po rtfolio w ith t he per formance o f a fa mily o f st yle ben chmarks t o determine the combination of indexes that best track the vocation of the portfolio, a nd s be en u sed, t raditionally, t o cla ssify a nd e valuate t he performance of equity mutual funds (see, e.g., Sharpe, 1992; Lobosco and DiBartolomeo, 1997; Otten and Bams, 2001) More recently, other pieces of research have appeared, focusing on the analysis of hedge funds due to their special characteristics (see, e.g., Fung and Hsieh, 1997; Agarwal and Naik, 2000; Ben Dor et al., 2003; Harri and Brorsen, 2004) Very l ittle i nvestigation s be en de voted t o st yle a nalysis a pplied t o Spanish portfolios as these works have been primarily dedicated to investment funds Fernández and Matallín (1999) analyzed the performance of Spanish funds during the period from 1992 to 1996, using the traditional model including six different benchmarks Ferruz and Vicente (2005) also analyzed the style of Spanish investment funds, highlighting the potential multicollinearity problems between benchmarks The rest of the study is organized as follows Section 26.2 describes the data, Section 26 ex plains t he m ethodology, Section 26 p resents t he * Spanish balanced pension plans have to invest in equity assets between 30% and 75% of their portfolios © 2010 by Taylor and Francis Group, LLC 692 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling empirical results of the research carried out, and Section 26.5 summarizes and concludes 26.2 DATA Two pension plan datasets have been created from data provided by the Spanish Association of Collective Investment and Pension Funds (Inverco) from April 2000 to December 2007 Both samples are free of survivorship and look-ahead biases, a nd co llect m onthly returns a nd t otal n et a ssets (TNAs) of 115 and 77 S panish balanced pension plans investing in Euro zone and global equities, respectively Information o btained f rom t he ma nagement co mpanies s be en decisive t o cla ssify t he po rtfolios acco rding t o t heir i nvestment v ocations because Inverco distinguishes only basic categories such as fi xedincome, eq uity, ba lanced, a nd g uaranteed p lans On ce t he i nvestment goal of each portfolio is identified, we find that the number of domestic plans is low, while Euro zone and world equities represent the principal vocations of Spanish balanced pension plans (around 70% of the entire dataset) Table 26.1 presents some basic descriptive statistics of both databases A sharp increase in the total assets managed by Spanish balanced pension plans can be observed A significant rise in the number of investors is also TABLE 26.1 Descriptive Statistics of the Spanish Pension Plan Samples April 2000 Number of pension plans Total net assets (million euros) Number of investors Average assets by pension plan (million euros) Average number of investors by pension plan Notes: 68 December 2007 88 April 2000 11 52 1.040 3.948 215.101 15.29 707.524 44.86 70.572 20.45 398.339 39.48 8.04 6.416 7.66 3.163 225 December 2007 2.053 This table reports the figures of Spanish balanced plans Specifically, the left part reports the statistics of those pension plans investing in Euro zone and the right part r eports t he st atistics o f t hose p lans in vesting in w orld ma rkets The table contains the number of listed pension plans on the dates indicated, the net assets managed, the number of investors, the average assets by portfolio, and the average number of investors by plan Thes e figures are referred to the beginning and the end of the sample period (April 2000 and December 2007) © 2010 by Taylor and Francis Group, LLC RBSA Applied to Spanish Balanced Pension Plans ◾ 693 seen for both the investment aims On t he contrary, the number of pension plans has remained stable over time Using data from international and national associations such as Morgan Stanley Capital International, Bank of Spain, and International Financial Analysts,* we collected information about the monthly returns of a set of benchmarks that represent the main investment objectives of the pension plan portfolios As one of t he subcategories a nalyzed gathers portfolios t hat i nvest in w orld eq uities, w e co llected i nformation o f se veral eq uity ben chmarks from different stock markets such a s the United Kingdom, the Euro z one, t he w orld, t he U nited S tates, a nd J apan a long w ith se veral S panish an d E uropean G overnment f ixed-income b enchmarks, a p rivate deb t i ndex, a nd a ben chmark r epresentative o f c ash W ith this broad set of benchmarks, we make sure that we have considered all t he ba sic a sset t ypes ex isting i n t he portfolio holdings of Spanish balanced pension plans Specifically, we gather i nformation about 12 benchmarks A n ex haustive de scription of t hese i ndexes i s shown i n Appendix 26.A.1 26.3 METHODOLOGY In this section, we describe the basic model used to determine the strategic asset allocations The model proposed by Sharpe (1992) focused on obtaining the portfolio assignments on a number of major asset classes, estimating t he ex posures o f po rtfolio r eturns t o t hese r elevant ben chmarks This RBSA can be described as follows: R pt = β0 + β1R1t + + β j R jt + + βk R kt + ε pt (26.1) where Rpt(Rjt) is the return of pension plan p (basic asset type j) in month t βj is the style weight of the basic asset class j β0 is t he added va lue of ac tive ma nagement above t he merely pa ssive tracking of the style portfolio† εpt is the residual return not explained by the model * See http://www.mscibarra.com/ for equity benchmark information and http://www.bde.es/ and http://www.afi.es for fi xed-income and cash indexes † The parameter β has been included in the model following the approach of D e Roon et al (2004) and Harri and Brorsen (2004) © 2010 by Taylor and Francis Group, LLC 694 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling In order to obtain robust estimations, the benchmarks must be mutually exclusive (not including any securities that already form part of any other ben chmark co nsidered), ex haustive (as ma ny st rategic a ssets a s possible should be included in the model), and they must have returns that d iffer f rom e ach o ther ( the co rrelation be tween t he ben chmarks should be low) Hence, the model requires a balance between the level of precision and the number of explanatory benchmarks because an appropriate selection of styles is crucial to obtain a suitable style model In this sense, Lobosco and DiBartolomeo (1997) show that the accuracy of the model d oes n ot n ecessarily i mprove wh en co nsidering f urther ben chmarks B uetow e t a l (2000) a nd B en Dor e t a l (2003) a lso st ate some concerns about possible distorted findings because of linearity problems of the benchmarks Following t he st yle a nalysis proposed by Sha rpe (1992), t he m odel i s solved b y o btaining a se t o f st yle w eights βj t hat minimize t he residual variance wh en considering t wo r estrictions: t he e stimated st yle weights sum to one and they must be nonnegative T T Min∑ ε 2pt = Min∑ (R pt − (β0 + β1 ⋅ R1t + t =1 subject to t =1 k ∑ j =1 β j = 1, ≤ β j ≤ 1, + β j ⋅ R jt + + βk ⋅ Rkt ))2 (26.2) j = 1,2,…, k The portfolios analyzed in this study comply with both features, which enable us to state that this restricted model leads to the most accurate style estimates In some cases, these constraints may cause biased results, such as when hedge funds are analyzed A circumstance that has led to relax the positivity constraint to some authors.* Finally, it is relevant to note that these models are typically evaluated in terms of their ability to explain the returns of the portfolio Ther efore, the coefficient of determination can be i nterpreted as the percentage of the variability of the return of portfolio p due to the portfolio style decision In this sense, high values of R coefficients provide evidence of the accuracy of the model applied and, furthermore, imply that the results obtained from the parameter β0 reflect properly the added value reached by the active management of the portfolio analyzed as stressed by De Roon et al (2004) * See Fung and Hsieh (1997), Agarwal and Naik (2000), Ben Dor et al (2003), among others © 2010 by Taylor and Francis Group, LLC RBSA Applied to Spanish Balanced Pension Plans ◾ 695 26.4 EMPIRICAL RESULTS 26.4.1 Definition of the Basic Asset Classes and Study of the Multicollinearity Given the investment vocation of the database analyzed, we have to consider d ifferent eq uity i ndexes a s w ell a s d ifferent fixed-income benchmarks representing the wide variety of assets that can be included in these portfolios Moreover, an exhaustive analysis of multicollinearity between the benchmarks has to be carried out to ensure that the proposed models will not generate results that fail to reflect appropriately the actual investment styles In this sense, as we have previously mentioned, a total of 12 benchmarks have been considered, being the correlation results shown in Appendix 26.A.2 High positive and statistically significant correlation is observed between the five eq uity be nchmarks ( MSCI Emu in dex, World i ndex, U.S i ndex, Japan index, and U.K index), as well as between the different fixed-income benchmarks, regardless of the maturity of the assets included in each index Hence, Appendix 26.A.2 demonstrates the importance of selecting the right style i ndexes, a s some authors l ike B en Dor e t a l (2003) a nd Ferruz a nd Vicente (2005) ve st ressed S pecially, wh en t he a nalysis i s t ackled o n a less developed market such the Spanish industry where it is difficult to find benchmarks that fulfill the requirements established by Sharpe (1992) Bearing in mind the results provided by the multicollinearity analysis, the style models proposed for each sample are as follows: Euro-Zone R pt = β0 + β1RMSCIEmut + β2 R5yPublicdebt,t + β3 RRepost + ε pt (26.3) Global R pt = β0 + β1RMSCIWorldt + β2 R5yPublicdebt,t + β3 RRepost + ε pt (26.4) Therefore, the models proposed include an equity benchmark that is representative of the investment vocation (MSCI Emu index or MSCI World index), a l ong-term fi xed-income benchmark (5 y ear public debt) a nd a cash index (1 day treasury bill repos) representing the liquidity that these investment portfolios have to hold in order to face the withdraws 26.4.2 Importance of Asset Allocation on the Variability of Returns over Time The variability of returns over time explained by the asset allocation policy is obtained by regressing the performance obtained by each pension plan (total return) against the performance obtained by the asset allocation policy © 2010 by Taylor and Francis Group, LLC 696 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling (policy return), reporting the R2 coefficient In this sense, the policy return of a pension plan p in the period t, PRpt, is calculated by the mere tracking of the strategic weights of the basic assets allocated by the pension plan: PR pt = β1RMSCIt + β2 R5yPublicdebt,t + β3 RRepost (26.5) where PR pt is the policy return of pension plan p in month t Rjt is the return of the benchmark of the basic asset type j in month t βj is the style factor or policy weight of the basic asset type j In order to present comparable results, Table 26.2 shows the R2 coefficients obtained from the style analysis for the equally weighted portfolios considering a ll su rviving pension plans w ith at least 36 o bservations i n t he t wo samples analyzed In this sense, our results confirm the evidence previously found in financial literature, with 90% of the variability of Spanish balanced pension plan returns over time explained by the variability of policy returns This finding is similar in the two samples considered and indicates the high degree of tracking of the strategic policy by pension plan managers As we have previously mentioned, an original contribution of this research is the evaluation of the incidence of several well-known biases in financial l iterature, such a s su rvivorship bias a nd look-ahead bias a long with the influence of portfolio size In this case, this analysis is applied in the most controversial question: the importance of asset allocation in the variability of returns over time To reach this aim, we have built three different equally weighted portfolios: first, an unbiased portfolio gathering all Spanish pension plans existing i n e ach per iod r egardless o f t he n umber o f o bservations; seco nd, a survivorship bias portfolio that encompasses only those plans that survive at the end of the sample period (December 2007); and third, a look-ahead TABLE 26.2 Results of Time-Series Regression in Financial Literature Brinson et al (1986) Brinson et al (1991) Ibbotson and Kaplan (2000) Drobetz and Kưhler (2002) Spanish balanced pension plans © 2010 by Taylor and Francis Group, LLC Sample Average R2 (%) U.S pension funds U.S pension funds U.S mutual funds U.S pension funds German–Swiss mutual funds Euro zone equity World equity 93.60 91.50 81.40 88.00 82.90 89.06 91.09 RBSA Applied to Spanish Balanced Pension Plans ◾ 697 TABLE 26.3 Portfolio Results of Time-Series Regression Euro Zone Equities Unbiased portfolio Portfolio with survivorship bias Portfolio with look-ahead bias Unbiased asset-weighted portfolio Notes: World Equities R% Gap% R 2% Gap% 89.29 89.14 89.40 92.76 — −0.15 0.11 3.47 90.43 91.23 90.61 90.89 — 0.80 0.18 0.46 The det ermination co efficient r esults o f five different p ortfolios a re shown in o rder to detect t he influence of s ome biases on t he importance of asset allocation on the variability of returns over time Besides, the table provides information about the difference (gap) between the determination coefficients of the different portfolios in comparison to the unbiased equally weighted portfolio bias portfolio gathering only t hose pension plans w ith at least 36 o bservations Moreover, we have computed an asset-weighted portfolio for the unbiased dataset Thus, a total of four portfolios have been examined The results are shown in Table 26.3 A similar incidence of look-ahead bias is observed in both datasets The consideration of a minimum period of time leads to a higher R coefficient, thereby, increasing the importance attributed to asset allocation to explain the variability of returns over time In contrast, the impact of survivorship bias is not so cl ear since different patterns are revealed by pension plans that i nvest i n Euro z one a nd world equities Finally, t he h igher R2 coefficient r eached i n a sset-weighted po rtfolios se ems t o i ndicate t hat a sset allocation is more important in large pension plans 26.4.3 Importance of Asset Allocation on the Variability in Returns among Plans Following the study of Ibbotson and Kaplan (2000), we try to determine how m uch o f t he va riation i n r eturns a mong p lans i s ex plained b y t he differences i n t he po rtfolio st rategic po licies This a pproach i mplies a cross-sectional regression of compound m onthly t otal returns (T R p) on compound monthly policy returns (PR p) for the entire period, being these compound rates of return for each plan p calculated as follows: TR p = T (1 + TR p ,1 )(1 + TR p ,2 )…(1 + TR p ,T ) − (26.6) PR p = T (1 + PR p ,1 )(1 + PR p ,2 )…(1 + PR p ,T ) − (26.7) © 2010 by Taylor and Francis Group, LLC 698 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling where TR p (PR p) is the compound monthly total (policy) return on plan p over the entire period of analysis TR p,t (PRp,t) is the total (policy) return of plan p in month t T is the number of monthly returns, t = 1, 2,…, T The cross-sectional R2 coefficient of this analysis reports the variability of returns among Spanish balanced pension plans explained by the different strategic policies allocated In this sense, if all portfolios perfectly followed the same passive asset allocation policy, there would be no variation among plans In contrast, if all pension plans were invested passively with a wide range of asset allocation policies, all the variations in returns would be attributable to strategic policy Accordingly, the two factors that drive the cross-sectional R2 are the differences between the pension plan’s asset allocation policies and the differences in the degree of active management.* Table 26.4 shows the R coefficients obtained from the cross-sectional regressions c arried out i n our s amples a s well a s t he findings shown in prior research The R coefficients g oes f rom 2.39% t o 5.66%, wh ich i mplies t hat asset allocation explains, on average, more than 40% of the variation of returns across pension plans It is important to note that Spanish balanced p lans i nvesting i n E uro z one eq uities ex hibit a h igher R coefficient than those investing in world equities Thus, the results reveal that TABLE 26.4 Portfolio Results of Cross-Section Regressionsa Sample Average R2% Brinson et al (1986) Brinson et al (1991) Ibbotson and Kaplan (2000) U.S pension funds — U.S pension funds — U.S mutual funds 35 U.S pension funds 40 Drobetz and Köhler (2002) German–Swiss mutual funds 65 Spanish balanced pension plans Euro zone equity 55.66 World equity 42.39 a Our results are free of survivorship bias but they present look-ahead bias in order to obtain statistically significant results, whereas prior studies present both biases Due to the existence of look-ahead bias in the sample, the assessment of the incidence o f the biases is no t appropriate in t his cross-sectional analysis * Ibbotson a nd Kaplan (2000) show how t he degree of a ctive management a ffects the crosssectional R © 2010 by Taylor and Francis Group, LLC RBSA Applied to Spanish Balanced Pension Plans ◾ 699 Spanish pens ion plans eng aged very l ittle i n ac tive ma nagement, e specially plans investing in Euro zone equities where a slightly higher R can be observed The notion of lower R2 when portfolios have a more variety of investment securities is confirmed when we compare Euro zone and world pension plans 26.4.4 Importance of Asset Allocation on the Level of Return Most o f t he m isinterpretations o f t he r esults o f B rinson e t a l (1986, 1991) stem from answering the question about the importance of asset allocation on the level of return with their fi ndings In order to give an appropriate answer for the Spanish pension market, the contribution of asset allocation on the level of return is analyzed by applying two different methods Firstly, the percentage of total return explained by policy return is calculated for each pension plan as the ratio of PRp divided by TRp This ratio was originally proposed by Stevens et al (1999) being used in other works, such as those of Ibbotson and Kaplan (2000) and Drobetz and Köhler (2002) Ratio of compound returns = PR p TR p (26.8) The ratio will take the value of one whether a pension plan passively tracks its st rategic policy, whereas it w ill be la rger ( less) t han one i f t he ac tive management of t he pens ion plan u nderperforms (outperforms) its st rategic policy Thus, t he r atio c an be se en a s a per formance measure t hat indicates the value added by active management to the strategic policy As shown i n Table 26.5, t he ratio obtained for ba lanced pension plans t hat TABLE 26.5 Total Return Level Explained by Policy Return Sample Brinson et al (1986) Brinson et al (1991) Ibbotson and Kaplan (2000) Drobetz and Köhler (2002) Spanish balanced pension plans U.S pension funds U.S pension funds U.S mutual funds U.S pension funds German–Swiss mutual funds Euro zone equity World equity © 2010 by Taylor and Francis Group, LLC Ratio of Compound Returns 1.12 1.01 0.99 1.04 1.34 0.98 0.55 700 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling invest in Euro zone equities is very close to one, while the result revealed by plans investing in world equities shows that active management is adding value to the mere passive tracking of their strategic policy Secondly, we follow the approach suggested by De Roon et al (2004) and Ha rri a nd B rorsen ( 2004) t o de tect wh ether ac tive a sset ma nagement c an add va lue t o S panish ba lanced pens ion plans T hus, we estimate the β0 parameter t hat represents t he return t hat active management adds to the mere passive tracking of the strategic policy portfolio W e t hen co mpare i t w ith t he ma nagement a nd c ustodial f ees charged b y t hese pens ion p lans.* T hus, t he t otal r eturn o f a pens ion plan is calculated as follows: TR pt = β0 + β1R MSCIt + β2 R5yPublicdebt,t + β3 RRe post (26.9) De Roon et a l (2004) show t hat a pos itive (negative) va lue of β0 implies that a pens ion plan outperforms (underperforms) the style portfolio and therefore ac tive ma nagement o btains a pos itive (negative) ex cess r eturn relative to the mere passive tracking of the benchmark portfolio only if a perfect st yle portfolio is found, which implies t hat t he residual va riance of the style model is zero This requirement is satisfied in our models with R2 coefficients close to The results of the estimations of the return that active management adds to the policy portfolio and their confidence intervals are presented in Table 26.6 Small values of β0 are obtained in all the portfolios considered regardless o f t he i nvestment v ocation, bei ng n egative i n t he a sset-weighted portfolio of pension plans t hat i nvest i n Euro zone equities This finding could be i ndicating t hat t he va lue added b y ac tive ma nagement i n TABLE 26.6 β0 Coefficients and Confidence Intervalsa Balanced Plans Equally weighted portfolio Asset-weighted portfolio a Euro Zone Equities World Equities 0.0003 (−0.0058; 0.0064) −0.0003 (−0.0051; 0.0045) 0.0013 (−0.0033; 0.0059) 0.0010 (−0.0037; 0.0057) The figures presented in this table correspond to the unbiased portfolios * The average monthly management and custodial fees charged by pension plans are 0.158%, and 0.162% for Euro zone and global balanced pension plans © 2010 by Taylor and Francis Group, LLC RBSA Applied to Spanish Balanced Pension Plans ◾ 701 large pension plans is lower than in the rest of portfolios However, these coefficients are not statistically significant It i s i mportant to t ake i nto account t hat t he va lue subtracted i n a ssetweighted portfolios is lower t han t he average fees cha rged by t hese plans Therefore, pension plan managers seem to be adding value to the mere passive tracking of their strategic policy Once more, the value added by active management seems to be higher in those portfolios that invest in world equities As can be se en, t he findings obtained when applying the second approach are very similar to those achieved by using the ratio of compound returns Finally, Table 26.6 provides evidence that the values of the average fees cha rged by Spanish ba lanced pension plans fa ll i nside t he confidence intervals of β0 These results allow us to claim that management and custodial fees are not statistically different to the value that active management subtracts from the passive tracking of the strategic portfolio i n eq ually w eighted po rtfolios T herefore, i n g eneral ter ms, w e can conclude that Spanish pension plan managers are adding a higher value through the active management than the average fees charged by the plans 26.5 SUMMARY AND CONCLUSIONS The research carried out in this study has been widely applied to investment funds and to developed markets However, little is known about the RBSA of pension plans in emerging markets like Spain In this sense, our study not only contributes to the literature by analyzing the importance of strategic asset allocation on the performance yielded by Spanish pension plans We go a step further trying to quantify the incidence of some biases on this importance From our a nalyses, we provide e vidence t hat nonexhaustive models can i dentify t he m ost r epresentative ba sic a ssets r egarding t he i nvestment vocation of the portfolios Specially, in less developed markets, where few benchmarks f ulfi ll t he hypothesis required by t he st andard methodology Our r esults a lso co nfirm t he i dea po inted o ut i n financial literature about t he i mportance o f a sset a llocation o n po rtfolio per formance We find that strategic policy explains, on average, about 90% of the variability of returns over t ime, more t han 0% of t he va riation i n returns a mong plans, and about 100% of the total return obtained © 2010 by Taylor and Francis Group, LLC 702 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling APPENDIX 26.A.1 Euro zone stocks Index: M SCI E MU ( European E conomic and M onetary U nion) Index Free-float a djusted ma rket c apitalization–weighted i ndex t hat is designed to measure the equity market performance of countries within EMU As of June 2007, the MSCI E MU Index consisted of the following 11 developed market country indices: Austria, Belgium, Finland, France, G ermany, G reece, I reland, I taly, th e N etherlands, P ortugal, and Spain World stocks Index: MSCI World Index Free-float ad justed ma rket ca pitalization–weighted index t hat is designed to measure the equity market performance of developed markets As of June 2007, t he MSCI World Index consisted of the following 23 de veloped market country indices: Australia, Austria, Belgium, Canada, D enmark, Finla nd, F rance, G ermany, G reece, H ong K ong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, t he United K ingdom, and t he United States U.S stocks Index: MSCI U.S Index Free-float a djusted m arket c apitalization–weighted i ndex t hat is de signed t o m easure t he eq uity ma rket per formance o f t he U S market U.K stocks Index: MSCI U.K Index Free-float a djusted m arket c apitalization–weighted i ndex t hat i s designed t o m easure t he eq uity ma rket performance of t he U nited Kingdom market Japanese stocks Index: MSCI Japan Index © 2010 by Taylor and Francis Group, LLC RBSA Applied to Spanish Balanced Pension Plans ◾ 703 Free-float a djusted m arket c apitalization–weighted i ndex t hat is de signed t o m easure t he eq uity ma rket per formance o f t he J apan market Intermediate-term Spanish Public bonds Index: Deuda Soberana a años Government bonds with years to maturity Long-term Spanish public bonds Index: Deuda Soberana a 10 años Government bonds with 10 years to maturity Intermediate-term Euro zone public bonds Index: Deuda Soberana Zona Euro a años Euro Zone Government bonds with years to maturity Intermediate-term Euro zone public bonds Index: Deuda Soberana Zona Euro a años Euro Zone Government bonds with years to maturity Corporate bonds Index: AIAF Spanish corporate bonds with year to maturity Intermediate-term bills Index: Bank of Spain 1-year Treasury Bills Treasury Bills with year to maturity Short-term bills Index: Bank of Spain 1-day Treasury Bill Repos Cash-equivalents with day to maturity © 2010 by Taylor and Francis Group, LLC MSCI Emu MSCI Emu MSCI World MSCI USA MSCI Japan MSCI UK 5-year Spanish publish bonds 10-year Spanish public bonds 3-year European public bonds 5-year European public bonds Treasury bills Private bonds Repos MSCI World MSCI USA MSCI Japan 0.922** 0.858** 0.976** 0.431** 0.596** 0.499** **,* Statistically significant at 0.01 and 0.05, respectively © 2010 by Taylor and Francis Group, LLC 5-year Spanish Public MSCI UK Bonds 0.906** 0.907** 0.839** 0.481** −0.546** −0.560** −0.552** −0.280** −0.542** 5-year 3-year 10-year Spanish European European Public Treasury Public Public Bonds Bills Bonds Bonds Private Bonds −0.450** −0.470** −0.463** −0.214 −0.463** 0.961** Repos −0.573** −0.585** −0.560** −0.307** −0.539** 0.957** −0.521** −0.529** −0.516** −0.233* −0.496** 0.981** −0.537** −0.584** −0.536** −0.418** −0.574** 0.728** −0.251* −0.264* −0.209 −0.312** −0.292** 0.101 −0.237* −0.228* −0.159 −0.302** −0.269* 0.142 0.880 0.956** 0.582** 0.008 0.066 0.964** 0.796** 0.167 0.211 0.685** 0.067 0.121 0.506** 0.512** 0.926** 704 ◾ Pension Fund Risk 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59–69 Sharpe, W F., 1992 A sset allo cation: Management sty le and p erformance me asurement, Journal of Portfolio Management, 18(2), 7–19 Stevens, D., R J Surz, and M Wimer, 1999 The importance of investment policy, Journal of Investing, 8(4), 80–85 Swinkels, L and P J Van Der Sluis, 2006 Return-based style analysis with timevarying exposures, The European Journal of Finance, 12(6/7), 529–552 © 2010 by Taylor and Francis Group, LLC ... increase in the total assets managed by Spanish balanced pension plans can be observed A significant rise in the number of investors is also TABLE 26. 1 Descriptive Statistics of the Spanish Pension Plan... RBSA Applied to Spanish Balanced Pension Plans ◾ 701 large pension plans is lower than in the rest of portfolios However, these coefficients are not statistically significant It i s i mportant to. .. 704 ◾ Pension Fund Risk Management: Financial and Actuarial Modeling APPENDIX 26. A.2 RBSA Applied to Spanish Balanced Pension Plans ◾ 705 REFERENCES Agarwal, V and N Y Naik, 2000 Generalised style