Company characteristics could influence where capital is allocated in their corporate defined benefit (DB) plans, research has found.
According to a study, pension plans sponsored by firms with high innovation expenditures invested more in private equity in their DB plans. And those with large land and building holdings allocated heavily to real estate.
“Such alternative investment tilts result in private equity and real estate being overweighted relative to the average and median pension asset mix,” said Christina Atanasova, of Simon Fraser University in Canada, and Gilles Chemla, at the Imperial College Business School in London. “The links between the sponsors’ characteristics and the pension plan’s alternative assets remain robust.”
Specifically, the study found that one standard deviation increase in the ratio of research and development (R&D) expenses to capital led to an increase of more than 0.45% in a plan’s private equity investments. Sponsors in the top quartile of R&D expenditures invested twice as much in the asset class than those in the bottom quartile, the authors said.
For firms with large land and building holdings, one standard deviation increase in holdings led to a jump of more than 0.75% in allocation to real estate investments. The study also found firms in the top quartile of land and building holdings invested 15% more in real estate than those in the bottom quartile.
Moreover, the authors argued that there existed a “familiarity bias” in alternative investment tilts as statistics showed that firms became increasingly allocated to private equity investments in their pension plans after diving into R&D. The same was true for firms with land and building holdings and real estate.
However, Atanasova and Chemla said pension plans with such alternative tilts underperformed the median DB plan when measured for excess returns. According to research, funds sponsored by firms in the top quartile of R&D lagged far behind in abnormal return on private equity than those in the bottom quartile.
Read the full paper here.