The abilities of managers in UK pension funds. Are socially responsible managers superior?

• Main Author: Mercedes Alda
• Format: Article
• Language: English
• Published: Universidad del País Vasco (UPV/EHU) 2018-07-01
• Series: Management Letters/Cuadernos de Gestión
• Subjects: Pension fund; selectivity; skill; timing; United Kingdom
• Online Access: http://www.ehu.eus/cuadernosdegestion/revista/en/published-issues/articulo?year=2018&vol=18&num=1&o=1

The abilities of managers in pension funds and, especially, in Socially Responsible (SR) pension funds have only rarely been investigated. Both standard pension funds and specialized SR funds are concerned with social welfare, but SR pension funds present a special interest of study. Various works show that SR managers usually underperform conventional funds because they focus on social aspects, although other studies find that SR funds overperform. In this work, the stock-picking and style timing abilities of UK conventional and SR equity pension fund managers are studied, examining whether SR pension funds implement different strategies and contribute to developing more socially responsible outcomes. Additionally, the influence of SR as a risk factor is introduced. As far as is known, style timing and the introduction of the SR risk factor have not been previously studied in the context of SR pension funds. The results indicate that both kinds of pension fund develop similar investment strategies, investing in small cap and growth values. Moreover, both funds present negative performance, poor/negative stock-picking abilities, and perverse market timing abilities. SR managers exhibit superior style timing skills and are able to correctly time size and book-to-market strategies. The SR risk factor shows that SR pension funds have significantly positive loadings of this factor, which erodes their performance. Overall, none of the funds analyzed develop proper management, and the optimization of the risk-return binomial in SR funds may be constrained by SRI requirements.