Improved Risk Reporting with Factor-Based Diversification Measures

Improved Risk Reporting with Factor-Based Diversification Measures — February 2014

4. Empirical Analysis for Pension Funds

world 10 biggest ones. Also, we find the ENB measure to be higher than the ENC measure in some cases, suggesting that a seemingly poorly diversified diversification in terms of asset classes can hide a more diversified allocation in terms of underlying risk factors. Now, if we look at the third column of both panels in Table 14, we can assess the evolution of the allocation strategy of the pension funds after the big international turmoil caused by the subprime financial crisis. Almost all diversification measures increased except for the ENC of the Norwegian pension fund GPF, which decreased by 17.06%. However, it is interesting to notice that the ENB measure of the same fund slightly increased by 5.68%, which suggests that if GPF allocation is more concentrated in terms of asset classes in 2012 than it used to be in 2007, it is not necessarily less diversified in terms of underlying factor exposures. On the other hand, the Canadian pension fund CPC has significantly reduced its concentration (since its ENC has increased by 20.39%), but its diversification in terms of independent sources of risk has not substantially improved (only by 2.55%). Finally, we can see that even though both Dutch pension funds already had the highest diversification measures in 2007, they kept improving the degree of diversification in their portfolios from 2007 to 2012.

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An EDHEC-Risk Institute Publication