Pension fund assets have been accumulated rapidly during the past decades, and it is
evident that this trend will continue. An immediate problem arising from the rapid
accumulation of such a large volume of assets across countries is how to invest them.
Pension funds differ from other institutional investors, e.g. mutual funds, in that their
investment horizons are relatively long, typically 30-40 years. In addition, they are
pooled assets to support people’s retirement lives. The authorities have a policy
concern about their investment performance, because otherwise, the shortfalls will
have to be met by the nation state (Clark and Hu 2005a). In this paper, we seek to
address this issue from the macro perspective. By using a unique dataset covering 39
countries (17 EMEs and 22 OECD) and based on the classic mean-variance
optimisation approach, first we find a negative impact of international portfolio
investment restrictions on pension fund returns and risk, and this issue is particularly
serious for EMEs. Following a shift from the QAR to the PPR, the average risk is
expected to fall by 27% for EMEs pension funds, while the figure is 10% for OECD
pension funds. Second, there is evidence that if higher portfolio returns are wanted,
higher proportion should be invested in equities and foreign assets. Third, our results
show that pension funds should value the diversification benefit arising from property
investment (Booth 2002)