More Fun at Lower Risk: New Opportunities for PRI-Related Asset Management of German Pension Insurance Funds

Abstract

The main focus of our chapter is to assess the suitability of Social Responsible Investments (SRI) for the strategic asset allocation of German pension insurance funds. Our analysis considers prevailing regulation in Germany for asset allocation as well as alternative investment models that disregard the strict investment framework currently in place. Using the Vector Error Correction (VEC) methodology, a multivariate stochastic time series model, we estimate the data generating process of the underlying input variables of a representative asset portfolio. A bootstrap simulation on the estimated VEC models allows generating future return paths of the underlying portfolios. These return distributions will subsequently be used as input for the various asset allocation strategies we have chosen (both outright as well as derivative overlay structures). The empirical results of our research study are valuable: SRI-structured portfolios consistently perform better than conventional portfolios and derivative overlay structures enable pension fund managers to mitigate the downside risk exposure of their portfolio without impacting average fund performance.