The Market for Lemmings: The Investment Behavior of Pension Funds

David Blake, Lucio Sarno and Gabriele Zinna

Using a unique dataset that covers UK de ned-bene t pension funds’ asset allocations over the past 25 years, we show that pension funds display strong herding behavior when moving in and out of different asset classes and they herd in sub- groups (defined by size and sector type), consistent with the notion of `reputational’ herding. We also find that pension funds mechanically rebalance their portfolios in the short term in response to valuation changes, and they systemically switch from equities to bonds as their liabilities mature. Furthermore, the median fund is an index matcher, hence failing to earn a long-run liquidity premium.

Keywords: Institutional investors; herding; portfolio rebalancing; liquidity premium.

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