We study how subjective beliefs shape the portfolio allocations of institutional investors. Linking the multi-asset allocations of U.S. public pension funds to the long-term capital market assumptions of their consultants, we examine the extent to which differences in subjective expected returns, volatilities, and correlations map into differences in portfolio weights. We embed these belief inputs in a mean-variance framework that incorporates fund-consultant belief wedges, heterogeneous risk aversion, non-negative weight constraints, and a benchmarking incentive due to frictions. We find that pension fund allocations are significantly linked to belief implied mean variance efficient allocations across asset classes, across pension funds, and over time. Accounting for frictions is essential: it dramatically increases the pass through and explanatory power of beliefs to portfolio allocations. Overall, our results show that beliefs play a central role in institutional portfolio decisions and that frictions critically shape their transmission into observed allocations.

zlynne@ceibs.edu