Leaning with the Wind: Long-Term Asset Owners and Procyclical Investing
Bradley A. Jones
This paper seeks to shed light on the systematic investment patterns of long-term asset owners. Based on a sample of representative portfolios (totaling $24 trillion) for global central banks, U.S. public and private pension funds, U.S. insurers and U.S. endowment funds, four main findings are established. First, asset allocation decisions appear to reflect pro- rather than countercyclical tendencies. Second, procyclicality takes two forms of roughly equal importance—contemporaneous drift (in the sense that portfolio weights are allowed to inherit relative annual returns), and more active multi-year performance chasing. Third, there is little evidence that asset owners lean against time-varying risk premia. Fourth, procyclicality appears most evident in private pension funds. In reconciling these portfolio characteristics with stylized patterns in asset class returns and financial theories, I suggest the long-term asset owners examined in this study do not avail of their long-horizon edge.