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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

Presented at the IPRA Special Session on Pensions and COVID-19: The Global Experience

Portfolio Management for Insurers and Pension Funds and COVID-19: Targeting Volatility for Equity, Balanced and Target-Date Funds with Leverage Constraints

Speaker: Professor Michael Sherris (CEPAR and UNSW Business School)

Abstract: Insurers and pension funds face the challenges of historically low interest rates and 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, with the return per unit of risk relatively constant with respect to the leverage constraints. Of most interest to insurers and pensions funds, we find that the highest return per unit of risk is in targeted volatility balanced portfolios with equity and bond allocations. Furthermore, we demonstrate the outperformance of targeted volatility portfolios during the COVID-19 pandemic.

Bio: Michael Sherris is a part time Professor in the School of Risk and Actuarial Studies having retired in 2016. His part time role concentrates on research, research student supervision and mentoring of early career researchers particularly through the ARC Centre of Excellence in Population Ageing Research where he is a Chief Investigator and Director of Industry Engagement. He was Head of Actuarial Studies at UNSW until 2010 having been appointed to UNSW in 1998 to establish the Actuarial Studies program. He is a Fellow of the Institute of Actuaries of Australia, the Institute of Actuaries (UK) and the Society of Actuaries (North America).  His research focuses on longevity, health and functional disability risk modelling, long term care insurance and longevity risk management. His research has won a number of awards including the International Actuarial Association Bob Alting von Gesau AFIR Prize, Casualty Actuarial Society (CAS) annual prize for the most valuable contribution to casualty actuarial science published in American Risk and Insurance Association (ARIA) literature, a Geneva Association/IIS Research Program Shin Research Award For Excellence, the Redington Prize of the Society of Actuaries, Best Paper prize for the North American Actuarial Journal and the H M Jackson Memorial Prize of The Institute of Actuaries of Australia. In 2007 he was awarded Australian Actuary of the Year in recognition of his contributions to actuarial research and education both internationally and within Australia.