Paper

Journal of Asset Management (2007) 8, 176–187. doi:10.1057/palgrave.jam.2250072

Optimal robust and consistent active implementation of a pension fund's benchmark investment strategy

Tim van Hest1 and Anja De Waegenaere2

Correspondence: Tim van Hest, Department of Econometrics and OR, Tilburg University, Tilburg 5000 LE, The Netherlands. Tel: +31 13 466 29 13; Fax: +31 13 466 32 80; E-mail: [email protected]

1is a part-time PhD student at Tilburg University, The Netherlands, and the Head of credit risk modelling ABB department of Rabobank Netherlands. His current research interests include robust portfolio optimisation and credit risk modelling.

2is an associate professor of actuarial sciences and accountancy at Tilburg University. She obtained her PhD in mathematics in 1993. Her current research interests include actuarial modelling, robust portfolio optimisation, longevity risk and fair valuation.

Received 12 June 2007; Revised 12 June 2007.

Top

Abstract

The benchmark investment strategy of a pension fund typically consists of a number of benchmark categories, each of which is assigned a weight in the overall investment budget. In this paper we assume that the benchmark strategy is given, and determine a model for its optimal active implementation. Active implementation involves a number of investment managers each of whom are assigned a specific benchmark category. We present a mean–variance approach to determine, for each investment manager, the optimal budget as well as the fraction of that budget that can be used for deviations from the benchmark. The emphasis is on robustness of the optimal allocation with respect to parameter misestimation, and on consistency in terms of risk-return preferences between active implementation and benchmark investment strategy.

Keywords:

asset liability management, pension funds, active investment decisions, robust optimisation