Institutionalizing Countercyclical Investment: A Framework for Long-term Asset Owners
IMF Working Papers, February 29, 2016
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- Institutionalizing Countercyclical Investment: A Framework for Long-term Asset Owners
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Bibliographic details
- Authors: Bradley Jones
- Published: February 29, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513512495.001
Research questions and scope
- Do portfolio shifts by the world’s largest asset owners respond procyclically to past returns, or countercyclically to valuations?
- If countercyclical investment (with both market-stabilizing and return-generating properties) is a public and private good, how might asset owners be empowered to do more of it?
- Analysis is based on representative portfolios totaling $24 trillion for a range of asset owners (central banks, pension funds, insurers and endowments).
Key empirical finding
- Portfolio changes typically appear procyclical across the analyzed representative portfolios.
Framework recommendations to promote countercyclical investment
- Embed governance practices to mitigate “multi-year return chasing.”
- Rebalance to benchmarks with factor exposures best suited to long-term investors.
- Minimize principal-agent frictions.
- Calibrate risk management to minimize long-term shortfall risk (not short-term price volatility).
- Ensure regulatory conventions do not amplify procyclicality at the worst possible times.