ICPM Gives Top Research Award to Paper Exploring Active vs. Passive Investing

The International Centre for Pension Management gave the top prize in its annual research awards to a paper that uses a proprietary database to explore the relationship between the structure and size of defined benefit pension plans and their choice of management style and asset allocation.

The Canadian nonprofit oversees an academic research program that awards C$50,000 ($37,600) to the top three academic papers chosen following a peer review by its research committee.

The ICPM looks for papers with implications for fund management, engagement of plan participants, pension design, governance, long-term investing, risk management, environmental, social, and governance issues and other investment-related topics. To be considered, the papers must be completed or close to completion but cannot have already been published. Award winners are invited to present their research at a webinar or a discussion forum.

The top prize of C$20,000 went to “Scale Economies, Bargaining Power, and Investment Performance: Evidence from Pension Plans,” authored by Tjeerd de Vries, S. Yanki Kalfa and Allan Timmermann from the University of California, San Diego, along with Russ Wermers of the University of Maryland.

The paper is based on a unique proprietary database used to explore the relationship between the structure and size of defined benefit pension plans and their choice of active vs. passive management, internal vs. external management and allocation to public vs. private markets.

“Our results indicate a strong role for economic scale in pension plan investments: large plans have stronger bargaining power over their external managers in negotiating fees as well as access to better-performing funds, relative to small plans,” the authors wrote. “Large plans, hence, pay significantly lower fees per dollar invested than their smaller peers.”

The ICPM awarded C$15,000 to “A Quantity-Based Approach to Constructing Climate Risk Hedge Portfolios,” written by Georgij Alekseev of Palantir Technologies, Stefano Giglio of Yale University and Quinn Maingi, Julia Selgrad and Johannes Stroebel of New York University. Their paper proposes a new methodology to build portfolios that hedge the economic and financial risks from climate change.

“We introduce a quantity-based approach to hedging aggregate news about climate change and other macro risks,” the authors wrote. “Our quantity-based hedge portfolios outperform traditional approaches to hedging climate risks.”

The ICPM awarded another C$15,000 to “Counterproductive Sustainable Investing: The Impact Elasticity of Brown and Green Firms,” written by Samuel Hartzmark of Boston College and Kelly Shue of Yale University.

Hartzmark and Shue developed a new measure of impact elasticity, which they define as a firm’s change in environmental impact due to a change in its cost of capital.

“We show empirically that a reduction in financing costs for firms that are already green leads to small improvements in impact at best,” the authors wrote. “In contrast, increasing financing costs for brown firms leads to large negative changes in firm impact. Thus, sustainable investing that directs capital away from brown firms and toward green firms may be counterproductive, in that it makes brown firms more brown without making green firms more green.”

The organization also awarded honorable mentions to “Quantifying the Impact of Impact Investing” by MIT’s Andrew Lo and Peking University’s Ruixun Zhang, and to “How the Provision of Inflation Information Affects Pension Contributions: A Field Experiment,” by Pascal Büsing, Henning Cordes and Thomas Langer from the University of Münster.