Asset Management Conference

Conference program

Monday, August 19, 2024, ESMT

Investors Behavior

Perceived Corporate Values

Stefano Pegoraro (University of Notre Dame), Antonino Emanuele Rizzo (Nova SBE) and Rafael Zambrana (University of Notre Dame)

We show ESG investors trade off returns for lower exposure to regulatory violations and civil lawsuits. We document that flows to ESG funds are highly sensitive to adverse legal events among their holdings. Then, using a revealed-preference approach, we disentangle the socially responsible investments of ESG investors from their return-driven investments. We construct a stock-level measure of socially responsible sentiment to quantify investors’ perception of firms’ corporate values. An increase in sentiment predicts lower legal risk and lower returns in the future. The trade-off between returns and legal risk is more pronounced for stocks with higher volatility and ESG-rating dispersion.

Which Investors Drive Anomaly Returns and How?

Yizhang Li (Rutgers Business School), Stanislav Sokolinski (Michigan State University) and Andrea Tamoni (Rutgers Business School) 

The origins of asset pricing anomalies have long been a highly debated puzzle in financial economics. We provide new evidence on the sources of anomalies by linking the variation in anomaly returns to investor demand. The demand for stock fundamentals accounts for 38% of the variation, while uninformed demand shocks contribute another 38%. Flow-induced trading explains only 12% of the variation. The impact of demand from households and small institutions is particularly strong, whereas the effects of large institutions are far less significant. Our results indicate that most of the variation in anomaly returns cannot be attributed to fundamental-based trading by sophisticated investors or to fund flows, thereby challenging both the risk-based theories and models of institutional frictions.

Fund Behavior

(Re)call of Duty: Mutual Fund Securities Lending and Proxy Voting

Tao Li  (University of Florida), Qifei Zhu (Nanyang Technological University)

Taking advantage of a novel dataset on individual mutual funds’ securities lending activities, we provide the first systematic evidence that mutual funds, especially ESG funds, recall loaned shares prior to voting record dates. Funds’ recall-voting sensitivities differ based on their stated lending policies, ownership stakes in portfolio firms, and holding horizons, indicating heterogeneity in funds’ perceived values of voting rights. Recalled shares are more likely to be voted against management proposals, and in favor of shareholder proposals and dissident slates in proxy contests. Recall-sensitive funds attract higher fund flows and do not suffer poor performance because of foregone lending revenues.

Silent Swing: Do Bond Mutual Funds Tilt the Valuations of Their Holdings in Response to Flows?

Jaewon Choi (Seoul National University), Mathias Kronlund (Tulane University), Ji Yeol Jimmy Oh (Sungkyunkwan University) 

Mutual funds face risks of dilution from trading costs when investors place purchase or redemption orders. To deal with this risk, the SEC in 2018 started allowing U.S. mutual funds to change their net asset value (NAV) up or down by a prescribed amount in response to abnormally large flows—a practice known as swing pricing. However, no U.S. fund has thus far chosen to adopt this practice. This paper provides evidence that funds can employ an alternative way to change the value of their portfolios in response to flows, namely by changing the valuation of their underlying holdings. We refer to this phenomenon as “silent swing pricing,” as these swings in valuations are not announced and lack transparency, but still effectively achieve the same goal. Focusing on active fixed-income funds from mid-2008 to 2022, we find that a fund’s valuation gap of a particular bond relative to peer funds’ valuations is positively related to that fund’s same-day flows. The sensitivity of valuations to flows is greater when a fund experiences outflows than when it has inflows, and when it holds more illiquid securities. The extent of silent swing pricing is attenuated, however, by return smoothing incentives when funds have poor past performance and fragile investor base. We show this practice has persisted even after the 2018 SEC rule change.

Asset Allocation

Too Much “Skin in the Game” Ruins the Game? Evidence from Managerial Capital Gains Taxes

Anna Theresa Buehrle (DIW Berlin) and Chia-Yi Yen (University of Mannheim & University of Liverpool)

Co-investment, often seen as a remedy for agency problems, may incentivize asset managers to cater to their own preferences. We provide evidence that mutual fund managers with considerable co-investment stakes in their managed funds alter risk-taking decisions to prioritize their own tax interests. Exploiting the enactment of the American Taxpayer Relief Act 2012 as an exogenous shock to managerial capital gains taxes, we observe that co-investing fund managers increase risk-taking by 8%, as compared to managers without co-investment. More specifically, these managers adjust their portfolios by investing in stocks with higher beta. The observed effect appears to be driven by agency incentives and results in a deterioration of fund performance. We highlight the role of co-investment in transmitting managerial tax shocks to mutual funds.

On the Use of Currency Forwards: Evidence from International Equity Mutual Funds 

Wei Opie (Deakin University) and Steven J. Riddiough (University of Toronto)

We undertake the first comprehensive investigation into the use of currency forwards at international equity mutual funds. Using a unique hand-collected dataset spanning 15 years and over 1,200 US mutual funds, we identify three distinct styles to the use of currency forwards, spanning liquidity, hedging, and speculation motives. Funds frequently construct separate currency portfolios of both long and short positions that often contain exposure to currencies not in the underlying equity portfolio. These currency portfolios can be large, reaching as high as 60% of the fund’s total net assets. Furthermore, we find that forward usage is related to exchange rate momentum, carry, and volatility, and that funds with better currency-picking capabilities are also superior stock pickers. Among the group of non-user funds, we show that a dynamic approach to currency forward contract usage would have generated substantially stronger investment performance.

Active Fund Management 

Money Management and Real Investment 

Simon Gervais (Duke University) and Günter Strobl (University of Vienna)

We propose and analyze an equilibrium model of money management in which the asset allocation decisions of money managers affect the production decisions of firms. The model produces two main results. First, comparing the performance of money managers to that of the overall market portfolio becomes less appropriate as investors (endogenously) choose to delegate more of their money to them. Indeed, as money managers control more money, their holdings get closer to the market portfolio, making it less likely that they outperform it. Second, although money managers may be outperformed by the market portfolio after their fees are taken into account, it is optimal for investors to hire their services. This is because money managers prompt a more efficient allocation of capital, making the economy more productive and firms more valuable in the process. In fact, as we show, the presence of money managers can improve the welfare of all investors, whether or not these investors choose to delegate their investment decisions to money managers.

Fund Performance 

How does a Ban on Kickbacks Affect Individual Investors?

Nic Schaub (WHU) and Simon Straumann (WHU) 

This study investigates how a ban on payments from product providers to financial advisors impacts individual investors’ portfolio holdings and portfolio performance. To do so, we exploit a court ruling in Switzerland in 2012 that induced banks to ban kickbacks. We document a significant increase in the portfolio share of own-bank mutual funds and own-bank structured products following the ban, consistent with banks substituting income from kickbacks with income from own products. The poor performance of own-bank products negatively affects portfolio performance. Overall, our results point towards an unintended consequence of consumer protection.

Investor Learning and Mutual Fund Performance

George Aragon (Arizona State University), Jonathan Keen (Arizona State University), Yuri Tserluckevich (Arizona State University) and Michael Wymbs (Hyundai Capital America)

We extend the idea of Berk and Green (2004) to the case of mutual fund investors with limited learning abilities. We predict mutual funds’ capital inflows and their performance by leveraging a unique measure of investor focus— views of mutual funds’ regulatory filings from the SEC EDGAR database. We establish that heightened investor attention correlates significantly with higher inflows into specific funds, but lower performance. This correlation persists independently of investors’ examination of recent filings or older filings and cannot be attributed to automated download activity. The link is especially pronounced for types of statements that typically carry more pertinent information. The inflows of funds are more affected than the outflows, consistent with the view that investors search information when they intend to purchase.

Vikas Agarwal (Georgia State University), George Aragon (Arizona State University), Nicole Boyson (Northeastern University), Joe Chen (University of California Davis), Darwin Choi (CUHK Business School), Richard Evans (University of Virginia Darden), Francesco Franzoni (USI Lugano), Simon Gervais (Duke University), Linlin Ma (Peking University), Pedro Matos (University of Virginia Darden), Abhiroop Mukherjee (HKUST), Melissa Prado (Nova SBE), Stefan Ruenzi (University of Mannheim), Sergei Sarkissian (McGill University), Chris Schwarz (University of California Irvine), Clemens Sialm (University of Texas at Austin), Gunter Strobl (University of Vienna), Zheng Sun (University of California Irvine), Melvin Teo (SMU), Ashish Tiwari (University of Iowa), Marno Verbeek (Erasmus University), Russ Wermers (University of Maryland), Lu Zheng (University of California Irvine)

The conference takes place at the ESMT Berlin, in the former GDR “Staatsratsgebäude” at Schlossplatz 1. Built in 1964, the building hosted the headquarters of the East German government, the Staatsrat (GDR’s National Council), until 1989. A noteworthy example of Germany’s modern architectural heritage, the building was used in varying functions after reunification and was the temporary office of the German Chancellor from 1999 to 2001. It has since been renovated and transformed into one of Germany’s most modern educational centers.

Directions

Please see the How to get there page for further information.