Private pension funds: passivity at active fund prices

Abstract

From 2005 to 2015, the total assets managed by open private pension funds increased more than six times in Brazil, where the Free Benefit Generating Plan (PGBL) and the Free Benefit Generating Life (VGBL) represent 90% of these assets. However, private pension institutions are characterized by the collection of high management fees, thus keeping for themselves much of the benefits offered by the government as incentive for investment in this modality. High management fees are justified only when there is active management of these funds, theoretically generating higher performance: this study indicates that this is not the case in this market segment. Similar problems have been faced in other countries, such as the United Kingdom, Denmark, and Sweden, which filed investigation concerning funds that charge high management fees for active management, while they actually provide management that may be regarded as passive. This demonstrates the scale and relevance of this issue, which has been surveyed and addressed by this study. To do this, dynamic style analysis was performed, through rolling regressions, followed by Kalman filter analysis in funds from the top-five private pension institutions in Brazil. Analyzing the exposure evolution of these funds to various asset classes and the R2 generated, passivity traces were found, mainly in composite variable income funds. Such funds are precisely those that should be more actively managed, as they charge the highest management fees. This article also demonstrates it is possible to build a passive portfolio, having a very similar style and returns without statistically significant differences, but at a lower management fee (and aligned with passive funds).