Improved Risk Reporting with Factor-Based Diversification Measures

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

Appendices

Table 14: Diversification Measures of the World’s 10 Biggest Pension Funds Using a 5-Year Window for the Covariance in Year 2007 and 2012 (a) Effective Number of Constituents 2007 2012 Evolution Government Pension Investment Fund (Japan) 2.66 2.90 9.05% Government Pension Fund (Norway) 4.42 3.66 -17.06% Stichting Pensioenfonds ABP (Netherlands) 5.16 6.99 35.48% Korea National Pension Service (South Korea) 2.25 2.63 16.83% Federal Retirement Thrift Investment Board (USA) 2.14 2.56 19.48% California Public Employees (USA) 4.87 5.61 15.16% Chikyoren (Japan) 2.93 2.94 0.37% Canada Pension Plan (Canada) 4.61 5.55 20.39% Stichting Pensioenfonds Zorg en Welzjn (Netherlands) 7.41 7.53 1.62% California State Teachers (USA) 4.51 4.90 8.60%

(b) Effective Number of Bets 2007

2012

Evolution

Government Pension Investment Fund (Japan)

4.03

4.33

7.38%

Government Pension Fund (Norway)

4.00

4.22

5.68%

Stichting Pensioenfonds ABP (Netherlands)

4.63

5.05

8.96%

Korea National Pension Service (South Korea)

3.00

3.05

1.50%

Federal Retirement Thrift Investment Board (USA)

2.85

3.56

24.87%

California Public Employees (USA)

3.45

4.16

20.65%

Chikyoren (Japan)

3.52

3.76

6.63%

Canada Pension Plan (Canada)

3.80

3.90

2.55%

Stichting Pensioenfonds Zorg en Welzjn (Netherlands)

4.00

4.95

23.81%

California State Teachers (USA) 16.36% In panel (a), we display the evolution of the effective number of constituents (ENC) from 2007 to 2012, and in panel (b) we do the same with the effective number of bets (ENB) computed with an MLT approach for the world’s 10 biggest pension funds. The ENC measure is based on the weight values of the pensions’ positions, while the ENB is based on uncorrelated factors. The MLT method uses the sample covariance matrix of 10 risky benchmarks representing the fund’s asset allocation, and estimated with 5 years of historical returns. 3.35 3.90

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An EDHEC-Risk Institute Publication