Improved Risk Reporting with Factor-Based Diversification Measures

Improved Risk Reporting with Factor-Based Diversification Measures — February 2014

4. Empirical Analysis for Pension Funds

plan (the largest in the world) for Federal employees and members of the uniformed services. It offers five types of investments in the following different funds: G, F, C, S, I and L funds. The G Fund is a government securities investment fund that invests in short-term US Treasury securities and delivers rates of interest that are close to those of long-term government securities. The F Fund is a fixed income index investment fund that replicates US government, mortgage-backed, corporate and foreign bond securities issued in the US market. The C Fund is a common stock index investment fund that replicates the S&P500 and tracks the 500 large to medium-sized US companies. The S Fund is a small-capitalisation stock index fund that follows small and medium-sized companies that are not included in the S&P500 index. The I Fund is an international stock index investment fund that tracks international equities from large companies based in Europe, Australasia and the Far East. Lastly, the L Fund gathers life cycle funds that are invested in the five former funds and follow liability-driven strategies e.g. pre-determined asset allocations. According to Towers Watson’s ranking, FRTIB managed US$ 281,359 million at year-end 2011. California Public Employees (CalPERS) is a Californian public administration that manages institutional Californian funds for public schools, local agencies and state employers and provides them health and retirement benefits. At the end of 2011, it managed US$ 220,638 million. Its main activity is to administer retirement benefits through four different programs: CalPERS Retirement Benefits (which accounts for more than 90% of the total assets under management), Judges’

Retirement System Retirement Benefits (I and II) and Legislators’ Retirement System Retirement Benefits. CalPERS’ portfolio is widely diversified in terms of asset classes (fixed income securities, equities, private equity, commodities, real estates and other alternative derivatives) and allocates more than 50% of its total investments to domestic and international equities in 2012. Chikyoren (Pension Fund for Local Government Officials) is a Japanese pension plan that managed US$ 199,549 million at year-end 2011. Like GPIF, Chikyoren has a social responsibility toward Japanese citizens and residents and has to dedicate a great portion of its investment portfolio to government debt issued by the Fiscal Investment and Loan Program. And indeed, in 2012, it invests more than 60% of its portfolio in domestic fixed income, 15% in Japanese equities and only 10% in foreign bonds and 10% in foreign stocks. However, Local Government Officials only has a Japanese official website and it is very hard to find detailed information on its portfolio allocation in English or to reach an English-speaking contact. Therefore, we only managed to collect partial information on its investment allocation. Canada Pension Plan (CPP) is a pension fund that is administered by the Canada Pension Plan Investment Board (CPPIB), a government-independent organisation. CPPIB managed US$ 158,669 million at the end of 2011. CPPIB invests in a wide range of asset classes and follows a global portfolio strategy. In 2012, Canada Pension Plan invested indeed in domestic and international bonds, in mortgages, domestic and international equities, private

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An EDHEC-Risk Institute Publication