Presentation Abstracts

Mike Bessell and Matthew Hall, Invesco
Public versus Private Real Estate: Portfolio Construction Considerations
We examine the relationship between the returns of different types of public and private real estate investments and the extent to which they should be considered substitutes in a multi-asset portfolio context. We use principle component analyses to gain insights on the distinct drivers of return across private real estate, listed real estate, and equities. We examine the commonality of return drivers over the longer-term, but also at points of market stress and demonstrate that the investment returns of public and private real estate exhibit material deviations over shorter time periods. We conclude that, instead of thinking of public and private real estate as substitutes, asset allocators need to consider broader portfolio considerations, including the size of the allocation, the objective of the investment, and potential liquidity needs, to determine their allocations to both.

Keith Brown, University of Texas at Austin
Following the Leader: Comparing Asset Allocation Strategies and Performance for Endowment Funds and Pension Funds
University endowment funds and public defined-benefit pension funds are both regarded as long-term investors, but differences in the investment problems they face suggest that they should have distinct portfolio constructions. This study provides a comparative analysis of the asset allocation practices and investment performance of large samples of endowment funds and pension plans over the 2002-2022 period. We document a significant migration in the asset allocation schemes for both institutions from publicly traded securities (e.g., common stock, bonds) to privately held alternative positions (e.g., private equity, real estate, hedge funds, natural resources) over the sample period. The mixture of public and private market holdings in the average endowment and the average pension has converged over the years, but endowment funds led this allocation shift by at least three to five years, suggesting that pension funds adopted a “follow the leader” investment strategy that mimicked endowment policies. We corroborate this allocation trend by examining the employment decisions for investment staffs and board positions at the two types of institutions, showing that endowment funds began to acquire personnel with alternative asset investment experience well in advance of similar hiring decisions made by pension funds.

These asset allocations decisions impacted endowment and pension investment performance in different ways. On average, both institutions produced positive benchmark-adjusted (i.e., alpha) returns over the sample period, with large endowments outperforming smaller funds and the reverse being true for pensions. However, the typical pension fund produces a benchmark policy return substantially below its actuarial return assumption, and most of the pensions in the sample experience policy return underperformance in at least one out of every three years. This inability to meet their statutory liability obligations appears to have precipitated the private market allocation mimicking strategy the pension industry adopted, with those funds having no policy underperformance moving sooner to higher private market allocations than underperforming funds. A decomposition of return performance over the entire sample period shows that for both endowments and pensions, the benchmark allocation decision is the critical factor in explaining a fund’s return variation over time, while active (i.e., alpha) investment decisions are positive marginal contributors to the production of total return performance. Finally, we demonstrate that endowment funds adopt an optimal mixture of passive and active risks, whereas pension funds could benefit from increasing the level of active risk in their portfolios.

Gerard Garvey, BlackRock
Valuation of Asset Management Firms: Liquid vs Illiquid Alts and Management vs Performance Fees
Cash flow streams from asset management fees are not well understood. It’s widely believed that illiquid alternative asset managers trade at higher multiples because of their stable and low-beta cash-flows, management fees for liquid funds are next in reliability, and incentive fees for liquid alts such as hedge funds are essentially one-offs. We challenge these beliefs. First, we document that both cash flows and multiples for listed private equity firms have high betas especially over horizons exceeding one year. Second, we show that incentive fees have substantial persistence due to the fee structures and the strong relationship between flows and performance. Furthermore, incentive fees have an appealing right-skew property in contrast to management fees which are stable, until they are not.

Mark Kritzman, Windham Capital Management and David Turkington, State Street Associates
The Fallacy of Name Concentration
We challenge the widely held belief that high concentration in a few large stocks within major market indices is undesirable for investors. Considering both empirical data and theoretical perspectives on risk and diversification, we compare the outcomes that result from different levels of name concentration. We also illustrate how the underlying economic exposures of a capitalization-weighted index can remain diversified even if market capitalization weights are skewed towards a few large companies.

Clemens Sialm, University of Texas at Austin
The Geography of Savings Opportunities in Retirement Plans
We study mutual fund fees in 401(k) plans from 2011 to 2021 to examine disparities in retirement savings opportunities. We find that despite an increase in ERISA-based lawsuits and regulatory attention, workers face significant inequalities across geographies. We also show that the savings gap is further exacerbated by the asset allocation decisions of participants in higher-fee plans and the lower performance of the investment options available on these menus.