What Moves Money Managers' Portfolios? An Investigation of Preferences and Beliefs

Abstract

Asset allocation is widely recognized as the most fundamental decision in the investment process. Surprisingly little work has been done on examining what drives the asset allocation recommendations of professional investment advisors. To address this issue, we propose a general framework to identify and estimate the parameters characterizing the preferences and beliefs of money managers. In a mean-variance framework, we provide joint estimates of the preference parameters and the beliefs conditioned on observable information that most closely reproduce the dynamics of the observed portfolio recommendations made by a panel of international money managers for The Economist. Our findings suggest that money managers behave as low risk-averse investors and that heterogeneity in their conditional beliefs is key to explaining differences in the recommended portfolio allocations. The source of heterogeneity lies in the diverse interpretation of publicly available information. Using our general framework, we cannot reject the hypothesis that, in general, money managers use information efficiently.