Private Retirement Scheme Funds: Will the Asset Allocation Strategy Work For Retirees?

Abstract

One of the principal-agent problems is the asymmetric information between fund managers and investors. To mitigate this issue, this study conducts the return-based style analysis on Private Retirement Scheme funds to their asset allocation strategy. Our results show: First, conservative funds have a strong focus on fixed income products rather than equity. Second, in terms of asset allocation to equity, on average, growth funds have a higher allocation to foreign equity of 16.28 per cent, followed by moderate funds of 9.18 per cent; Third, growth funds focus on large growth stocks, while moderate funds focus on large value stocks. However, three observations deserve our attention: First, a high degree of selection for the conservative fund will entail higher transaction cost; and second, in terms of the degree of style and selection, conservative funds do not vary much from growth funds. In other words, there is no distinct product differentiation between the two categories; Lastly, there is a wide disparity in asset allocation across the conservative funds. This implies some degree of risk-taking by some fund managers. These results suggest that the financial goals of retirees will be undermined if PRS funds do not focus on their mandate.