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Portfolio management for insurers and pension funds and COVID-19: targeting volatility for equity, balanced, and target-date funds with leverage constraints

Published online by Cambridge University Press:  11 July 2023

Bao Doan ,
Jonathan J. Reeves  and
Michael Sherris Open the ORCID record for Michael Sherris [Opens in a new window]
Bao Doan
Affiliation:
Department of Economics and Finance, RMIT University Vietnam, Ho Chi Minh City, Vietnam
Jonathan J. Reeves
Affiliation:
School of Banking and Finance, UNSW Business School, University of New South Wales, Sydney, Australia
Michael Sherris*
Affiliation:
School of Risk & Actuarial Studies, Australian Research Council Centre of Excellence in Population Ageing Research (CEPAR), University of New South Wales, Sydney, Australia
*
Corresponding author: Michael Sherris; Email: m.sherris@unsw.edu.au
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Abstract

Insurers and pension funds face the challenges of historically low-interest rates and high volatility in equity markets, that have been accentuated due to the COVID-19 pandemic. Recent advances in equity portfolio management with a target volatility have been shown to deliver improved on average risk-adjusted return, after transaction costs. This paper studies these targeted volatility portfolios in applications to equity, balanced, and target-date funds with varying constraints on leverage. Conservative leverage constraints are particularly relevant to pension funds and insurance companies, with more aggressive leverage levels appropriate for alternative investments. We show substantial improvements in fund performance for differing leverage levels, and of most interest to insurers and pension funds, we show that the highest Sharpe ratios and smallest drawdowns are in targeted volatility-balanced portfolios with equity and bond allocations. Furthermore, we demonstrate the outperformance of targeted volatility portfolios during major stock market crashes, including the crash from the COVID-19 pandemic.

Keywords

COVID-19 pandemicequity investmentportfolio managementtarget-date fundsvolatility forecasting
Type
Original Research Paper
Information
Annals of Actuarial Science , Volume 18 , Issue 1 , March 2024 , pp. 78 - 101
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of Institute and Faculty of Actuaries

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