The Determination of The Optimal Portfolio of Pension Funds in Iran

Document Type : پژوهشی

Authors

• raha sadat ramezanian ¹
• Mohammadtaher Ahmadishadmehri ²
• mohamad javad razmi ³
• Mohammad Hossein Mahdavi Adeli ⁴

¹ Ph.D. student of economic, Ferdowsi University of Mashhad, International Campus, Mashhad, Iran

² Associate Professor, Department of Economics, Ferdowsi University of Mashhad, Iran

³ Assistant Professor, Department of Economics, Ferdowsi University of Mashhad, Iran

⁴ Professor, Faculty of Economic and Administrative Sciences, Ferdowsi University of Mashhad, Iran.

https://doi.org/10.22067/mfe.2021.67218.0

Abstract

INTRODUCTION

Pension funds, as intergenerational financial institutions, should be able to finance individuals in old age and disability by accumulating the micro-savings of the insured and investing in them. Therefore, one of the concerns of the mentioned funds is how to invest the micro-savings of the insured in different areas. In Iran, pension funds under the Ministry of Cooperatives, Labor and Social Welfare play a significant role in the capital market and more than 53% of the daily value of the assets of these funds belong to the listed companies (47% of non-listed capital), which possess more than 13% of the total market daily value (stock exchange and over-the-counter).
 
 

THEORETICAL FRAMEWORK

Minimizing portfolio risk, investors can obtain an efficient portfolio for a certain return. Continuation of this process leads to the development of efficient portfolios, called the mean-variance efficiency frontier. The following data are required to apply the Markowitz model:

Expected return on stock i, denoted by E(Ri).
The standard deviation of the expected return on ith stock, considered as an indicator for the risk of every stock, denoted by Si.
Covariance, as an indicator of coordination between the return rates of different stocks, denoted by δij.


METHODOLOGY

 To determine the optimal portfolio, first the returns of the days in which the transaction did not take place were interpolated by MATLAB and interpolation method and a matrix of 1354 × 9 was obtained. Then, at a 15 percent confidence level, the normality of the time series of returns of each group of industries was investigated by Jarque-Bera (JB) test. Next, the Markowitz model was solved and the weights were determined for each stock in the optimal portfolio of the Social Security Pension Fund. Research data were collected daily for the period 2015:03:25 – 2020:09:21 from the website of the Financial Information Processing Center of Iran and the Social Security Investment Company.

RESULTS & DISCUSSION

 Findings show that for investment in the Social Security Pension Fund, among real portfolio, the Markowitz model portfolio and the VaR model portfolio, the Markowitz model optimal portfolio is better than the VaR portfolio and the real portfolio as it has the highest return-to-risk ratio. In order to optimize the investment portfolio, this fund should increase its investment share in the groups of pharmaceutical materials and products by 7%, investments by 2% and the base metals by 1%. It should also reduce its investment share in the groups of multidisciplinary companies by 3%, chemical products by 3%, cement, gypsum and lime by 2% and petroleum products by 2%.

CONCLUSIONS & SUGGESTIONS

Since the results of the study show that the proposed portfolio of this study based on the Markowitz model is optimal for investing in the stock industries of the Social Security Fund, it is suggested to the authorities and planners of this fund to change their existing investment portfolio to the proposed portfolio and especially increase their share of investment in the group of pharmaceutical materials and products as the Social Security Organization (TPICO Holding) has an advantage in this industry on a national scale and its development is consistent with the organization's strategies. It is also suggested that the Social Security Fund reduce the dispersion of investment in markets-industries and over-investment in company management as it has always posed a great risk to pension funds around the world.

Keywords

• Investment Portfolio
• Stock Industries
• Social Security Fund
• Markowitz Model
• VaR Model

References

Refrencess

Amani, Mohammad Mehdi; Anari, Mohammad Reza. (2018). Actuarial Principals and Requirements for Merging Defined Benefits Pension Funds with Pension Fund of Social Security Organization, Quarterly Social Security Journal 13(2): 59-98.(In Persian)

Abbasi, Ibrahim; Teymouri, Babak; Molaei, Arefeh; Esmaili, Zahra. (2017). The Application of Conditional Value at Risk in Portfolio Optimization based on Structural Breakpoint Approach in Tehran Securities Exchange, 7 (2): 85-103. (In Persian)

Ardia, D.; Boudt, K., & Nguyen, G. (2018). Beyond Risk-Based Portfolios: Balancing Performance and Risk Contributions in Asset Allocation. Quantitative Finance, 8(18): 1249-1259.

Dahlquist, M. & Arne Ø. B. (2018). A Review of NorgesBank’s Active Management of the Government Pension Fund Global, University of Stavanger.

Davis , E. Philip. (2001). Portfolio regulation of life insurance companies and pension funds,  ISSN 1367-580X

Dobra, M., & H. Lubich, B. (2013). Public pension governance and asset allocation. The Business and Economics Research Journal, 6, 1-19.

Dideh-Khani, Hossein; Shiri Ghahi, Amir; Miran, Behzad. (2019). A model for selecting the optimal portfolio in conditions of uncertainty using the mean-odds model (prospective approach to estimate the yield function). Financial Knowledge of Securities Analysis, 12 (43): 73-87.

Ebrahimi, Ilnaz Hemmati, Maryam. (2018). The Role and Effects of Pension Funds on Financial Stability in Iran; The Necessity of a Macro Prudential Authority;, Central Bank of the Islamic Republic of Iran, Monetary and Banking Research Institute, Report code: 293880. (In Persian)

Gordon, J. A. Baptista, A. M. (2001). Economic implication of using a mean-VaR model for portfolio selection: A comparison with mean-variance analysis, Journal of Economic Dynamic control, 26: 94.

Gorjipour, Esmail; Akhavan Behbahani, Ali. (2020). The current situation of small social insurance funds and provide a model for them, Research Center of the Islamic Consultative Assembly, No. 17094. (In Persian)

Hashemi, Seyed Navid; Molavi, Negar. (2020). Analysis of capital market developments and review of the stock portfolio of pension funds affiliated to the Ministry of Cooperatives, Labor and Social Welfare, Deputy Minister of Economic Affairs and Planning of the Ministry of Cooperatives, Labor and Social Welfare. (In Persian)

Hanen, O. A. and Faouzi J. (2014). VaR Computation of Non-Gaussian Stochastic Model, Journal of Advanced Management Science, 2(1): 61-64.

Izadbakhsh, Hamid Reza; Soleimanzadeh, Ahmad; Davari Ardakani, Hamed; Zarrin Bal, Marzieh. (2017). A Systematic Approach for Asset Liability Management of Pension Funds in a Fuzzy Environment, Research and Economic Modeling, 29: 240-201. (In Persian)

Iran Financial Information Processing Center Website (2020). http://www.fipiran.com/

Inderst, G. (2014). Pension fund investment in infrastructure: lessons from Australia and Canada. Rotman International Journal of Pension Management, 7(1). 31-59.

ISSA, (2017). Guidelines on investment of social security funds. Turin.

Li, J., & Xu, M. (2013). Optimal dynamic portfolio with Mean-CVaR criterion. Risks, 1(3). 119-147.

Liu, Y. J., Zhang, W. G. & Zhang, Q. (2016). Credibilistic multi-period portfolio optimization model with bankruptcy control and affine recourse, Applied Soft Computing, 38: 890-906.

Mehdizadeh, Saber; Sabet, Parisa. (2012). Selection of Optimal portfolio of oil company pension fund using Markowitz and VaR models, Third Conference on Financial Mathematics and Applications, Semnan University, Semnan. (In Persian)

Naderi Nooreini, Mohammad Mehdi. (2018). The Best Methodology of Estimation of Value-at-Risk in Iranian Mutual Funds, 6 (1): 159-180. (In Persian)

Rai, Reza; Telangi, Ahmad (2008). Advanced Investment Management, Samat Publications, Second Edition.

Rajabi, Zahra; Gerami, Asghar. (2017). Financial, insurance and economic status of pension funds, Economic Deputy of the Ministry of Cooperatives, Labor and Social Welfare. (In Persian)

Rostami, Morteza; Badiani, Hossein (2019). Company Management of Pension Funds in the Social Security System of Iran, 21 (63): 271-295. (In Persian)

Rostami, Morteza; Habibnejad, Seyed Ahmad (2017). The Review of Investment of Iran's Pension Funds in light of Investment Principles, 14 (1): 95-115. (In Persian)

Rahnama Roodposhti, Fereydoun; Mirghafari, Seyed Reza (2013). Portfolio Performance Evaluation at Tehran Stock Exchange: The Use of Value at Risk, Journal of Financial Engineering and Securities Management, 71: 7-27. (In Persian)

Shahsharghi, Mohsen (2016). Bankruptcy of Pension Funds; Fire Under the Ashes of Iran's Economy, Government and Nation Weekly Journal, 10: 10-12. (In Persian)

Social Security Investment Company Website (2020). https://www.ssic.ir/#

Seegert, N. (2017). Optimal Tax Portfolios: An Estimation of Government Tax Revenue MinimumVariance Frontiers. URL: http://www-personal.umich.edu/~seegert/papers/OptimalTaxPortfolios_Seegert.pdf

Sharma, P. & Vipul, (2015). Performance of risk-based portfolios under different market conditions: Evidence from India, Research in International Business and Finance, Elsevier, vol. 34(C). pages 397-411.

Theron, L. Vuuren, G. V. (2018). The Maximum Diversification investment strategy: a portfolio performance comparison, Journal of Cogent Economics & Finance, DOI: http://doi.org/10.1080/23322039.2018.1427533.

Yin, X., Ni, Q. & Zhai, Y. (2015). A novel PSO for portfolio optimization based on heterogeneous multiple population strategy, In 2015 IEEE Congress on Evolutionary Computation (CEC) (pp. 1196-1203). IEEE.

Yu, X., Sun. H., & Chen, G. (2011). The optimal portfolio model based on Mean-CVaR. Journal of Mathematical Finance, 1, 123-121.