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

Bradley Jones

No 2016/038, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; asset owner; asset; return; Asset Allocation; Financial Stability; Asset Owners; Momentum; Risk Management; fixed income; asset class; fair value; private equity; Asset management; Pension spending; Stocks; Financial sector stability; Global (search for similar items in EconPapers)
Pages: 43
Date: 2016-02-28
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Citations: View citations in EconPapers (4)

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