The dilemma between fund‐style consistency and active management over the economic cycle. Evidence from pension funds

Mercedes Alda

International Journal of Finance & Economics, 2021, vol. 26, issue 2, 2219-2240

Abstract: This paper examines whether equity‐allocation shifts (equity‐holding and equity‐style shifts) jeopardize retirement savings in U.K. equity pension funds. Fund‐style shifts may deviate pension funds from their original risk profile and expose participants to undesired results. Nonetheless, these shifts may be the result of an active management to adapt to market cycles. Financial literature usually points out the policy‐allocation importance versus the active management in explaining fund returns; however, we find significant relation between them. Our results show that managers vary their portfolios to add value, avoid the constraints of preserving consistent styles, and adapt to market conditions. Participants do not negatively react to style changes because top shifter funds are run by skillful managers and outperform. Nevertheless, managers must be aware of their limitations and the risk taken with this strategy. Poor skilled managers do not successfully implement style‐shift strategies, especially in crises.

Date: 2021
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