Grouping Individual Investment Preferences in Retirement Savings: A Cluster Analysis of a USS Members Risk Attitude Survey

Cluster analysis is used to identify homogeneous groups of members of USS in terms of risk attitudes. There are two distinct clusters of members in their 40s and 50s. One had previously ‘engaged’ with USS by making additional voluntary contributions. It typically had higher pay, longer tenure, less interest in ethical investing, lower risk capacity, a higher percentage of males, and a higher percentage of academics than members of the ‘disengaged’ cluster. Conditioning only on the attitude to risk responses, there are 18 clusters, with similar but not identical membership, depending on which clustering method is used. The differences in risk aversion across the 18 clusters could be explained largely by differences in the percentage of females and the percentage of couples. Risk aversion increases as the percentage of females in the cluster increases, while it reduces as the percentage of couples increases because of greater risk sharing within the household. Characteristics that other studies have found important determinants of risk attitudes, such as age, income and (pension) wealth, do not turn out to be as significant for USS members. Further, despite being on average more highly educated than the general population, USS members are marginally more risk averse than the general population, controlling for salary, although the difference is not significant

One size fits all: How many default funds does a pension scheme need?

In this paper, we analyse the number of default investment funds appropriate for an occupational defined contribution pension scheme. Using a unique dataset of member risk attitudes and characteristics from a survey of a large UK pension scheme, we apply cluster analysis to identify two distinct groups of members in their 40s and 50s. Further analysis indicated that the risk attitudes of the two groups were not significantly different, allowing us to conclude that a single lifestyle default fund is appropriate

Fund Flows, Manager Changes, and Performance Persistence

Most empirical studies suggest that mutual funds do not persistently outperform an appropriate benchmark in the long run. We analyze this lack of persistence in terms of two equilibrating mechanisms: fund flows and manager changes. Using data on actively managed US equity mutual funds, we find that if neither mechanism is operating, winner funds (top-decile ranked in previous year) continue to significantly outperform loser funds (bottom-decile ranked in previous year) by 4.08 percentage points per annum. However, the difference between previous winner and loser funds declines to zero within one year if the two mechanisms are acting together. Thus, equity mutual fund out- and underperformance are unlikely to persist in well-functioning financial markets

Network Centrality and Delegated Investment Performance

We document a positive relation between network centrality and risk-adjusted performance in a delegated investment management setting. More connected managers take more portfolio risk and receive higher investor flows, consistent with these managers improving their ability to exploit investment opportunities through their network connections. Greater network connections are shown to be particularly important in reducing the diseconomies-of-scale for large managers who are well-connected. We also use the exogenous merger of two investment consultants, which creates a sudden change in the network connections of the managers they oversee, to provide evidence that a greater number of connections translates into better portfolio performance

Improved inference in the evaluation of mutual fund performance using panel bootstrap methods

Two new methodologies are introduced to improve inference in the evaluation of mutual fund performance against benchmarks. First, the benchmark models are estimated using panel methods with both fund and time effects. Second, the non-normality of individual mutual fund returns is accounted for by using panel bootstrap methods. We also augment the standard benchmark factors with fund-specific characteristics, such as fund size. Using a dataset of UK equity mutual fund returns, we find that fund sizehas a negative effect on the average fund manager's benchmark-adjusted performance. Further, when we allow for time effects and the non-normality of fund returns, we find that there is no evidence that eventhe best performing fund managers can significantly out-perform the augmented benchmarks after fundmanagement charges are taken into account

Why Does Mutual Fund Performance Not Persist? The impact and interaction of fund flows and manager changes

We explain the lack of long-term performance persistence by actively managed U.S. equitymutual funds in terms of two equilibrating mechanisms: fund flows and manager changes. Wefind that these mechanisms acting together affect the future performance of past outperforming(winner) funds and past underperforming (loser) funds. Fund flows in isolation have a significanteffect on performance, whereas manager changes in isolation have only a limited effect. Acombination of both fund flows and manager changes has a substantial impact on future fundperformance. If neither of these equilibrating mechanisms is operating, winner funds continue to significantly outperform loser funds by 4.08 percentage points per annum. However, the difference between winner and loser funds declines to almost zero if the two mechanisms are acting together. We also document that managers of winner funds increase risk, while managers of loser funds reduce risk, although losers who are fired took more risk than losers who keep theirjobs

Formation of singularities on the surface of a liquid metal in a strong electric field

The nonlinear dynamics of the free surface of an ideal conducting liquid in a strong external electric field is studied. It is establish that the equations of motion for such a liquid can be solved in the approximation in which the surface deviates from a plane by small angles. This makes it possible to show that on an initially smooth surface for almost any initial conditions points with an infinite curvature corresponding to branch points of the root type can form in a finite time.Comment: 14 page

Smart defaults: Determining the number of default funds in a pension scheme

We propose a new methodology for the smart design of the default investment fund(s) in occupational defined contribution pension schemes based on the observable characteristics of scheme members. Using a unique dataset of member risk attitudes and characteristics from a survey of a large UK pension scheme, we apply factor analysis to identify single factors for risk aversion, risk capacity and ethical investment preferences, and then apply cluster analysis to these factors to identify two distinct groups of members across age cohorts. We find membership of these clusters depends on a number of personal characteristics, with the principal differentiating feature being that one group had previously engaged with the pension scheme, while the other had not. These identified characteristics can be utilised in the design of smart default funds, including appropriate engagement strategies