“Many people are losing a couple of weeks of contribution to their pension because of this and if you look over many years then you are talking about losing a year or two of contributions,” said Campbell Harvey, a professor at Duke University and a co-author of the study. “This is a really big deal.”
Still, he said the losses were minimal and therefore may not be a priority for pension funds. “Given all the other moving parts in an institutional portfolio,” said O’Brien, “it is not clear to me that is the first place I would look to improve returns.”
Harvey presented his findings in a meeting last year with 20 major pension plans overseeing a combined $2tn in assets. The study suggested making rebalancing dates less predictable.
“If you’re saying, ‘we will rebalance at the end of the quarter,’ you are just inviting people to front-run you,” Harvey said.
The research by three US finance experts found that some traders take advantage of the funds’ “predictable” moves to realign allocations by making similar trades in advance, thereby worsening the price retirement funds get.
The lost value each year amounts to at least $16bn — one per cent of annual investment gains or about $200 per retiree — the research found. Pension funds are aware of the problem but have been slow to get their investment committees to fine-tune the rebalancing practices.
From: FT on 7-Feb-2024
