Estimating the effect of active management and private equity for defined benefit pension funds

We conduct a returns-based Sharpe (1988, 1992) style analysis of U.S. corporate defined benefit pension plans. The returns for corporate pension funds are reported only once per year, limiting the degrees of freedom for a returns-based style analysis. To address this problem, we introduce a "Search" method that systematically tests all possible combinations of a limited number of factors (market indices) to find the set with the highest explanatory power of historical returns. We find that pension funds exhibit significant exposure to private equity, much more so then balanced funds. We provide a new approach to measuring the relative contributions of policy and active management by using squared partial correlation coefficients to control for market movements. We find that pension funds show more active management compared to balanced funds. (c) 2020 Board of Trustees of the University of Illinois. Published by Elsevier Inc. All rights reserved.