Purpose - This paper examines the investment performance of pension funds in the UK using three standard performance measurement models, the CAPM, Fama-French model and the Carhart model.
Design/methodology/approach - We use the CAPS-Mellon survey data for the period 1990-2008 and employ the three standard performance measurement models, the CAPM, Fama-French model and the Carhart model in assessing the investment performance of the pension funds.
Findings - We show that the abnormal returns of pension funds cannot be fully explained by size, book-to-market values, market returns, momentum and the term spread. We find larger abnormal returns in bond than in equity portfolios and that smaller funds outperform larger funds. The paper also shows that the addition of the momentum factor does not improve on the three factor Fama-French model. We find that pension funds exhibit superior performance relative to the linear factor models.
Research limitations/implications - This study contributes to the extant literature on pension funds performance. Future research may also extend our work to incorporate economic, tax, political and legal differences across the countries on the performance of pension funds. Secondly, due to data constraints, this study excludes the default probability of corporate bonds as an additional variable in their tests on bond returns. Future work may add the default probability as an additional variable whilst examining bond returns
Practical implications - The authors believe that the findings will be considerable food for thought for fund managers who are continuously attempt to explore opportunities to provide a higher return to investors.
Originality/value - To our knowledge this is the first comprehensive study that investigates the performance of UK equity and bond pension funds relative to standard linear factor models such as the CAPM, Fama and French (1993), and Carhart (1997).