Portfolio Concentration Research Articles

Should Investors Defer Long-Term Gains in Taxable Stock Portfolios?

Investors with taxable portfolios sometimes delay the sale of appreciated stock to defer capital gains taxes. While this strategy does help to reduce taxes, it can cause the portfolio to become more concentrated over time, leading to higher overall volatility and lower long-term returns. This paper evaluates the tradeoff between tax efficiency and diversification via Monte Carlo simulation and finds that diversification is far more important for the investor’s terminal wealth, especially over longer time horizons. Under a reasonable set of assumptions, investors are better off rebalancing almost completely each year, even though it requires selling some recent winners and paying capital gains taxes. While tax efficiency does become somewhat more important for individuals who are taxed more heavily on gains or who expect an eventual step-up in basis, even these investors should tolerate only a modest increase in portfolio concentration.

COVID-19 and redemptions from Irish-resident bond funds

This paper examines net redemptions from bond funds domiciled in Ireland at the onset of the COVID-19 pandemic. We analyse various empirical specifications to determine whether factors such as fund leverage, measures of liquidity, portfolio risk and portfolio concentration, among others, explain outflows from Irish-domiciled bond funds in March 2020. The findings indicate that funds with a larger share of short-term securities and riskier bond portfolios experienced higher redemptions. Our analysis also suggests that fund size and age are significant factors affecting outflows. When examining various sub-samples, we find evidence of more reactive behaviour among investors in actively managed funds compared to passively managed funds. We also find that retail bond funds demonstrate greater sensitivity to risk and leverage, while professional funds show evidence of lower risk aversion. These results provide insights that can help inform policymakers’ view of regulatory tools for market-based finance, a key priority internationally.

Bank Competition, Loan Portfolio Concentration and Stock Price Crash Risk: The Role of Tone Ambiguity

AbstractWe examine the association between loan portfolio concentration, competition and stock price crash risk in the US banking industry. We find that during economic downturns, banks with poorly diversified loan portfolios that operate in competitive markets are more likely to crash. Importantly, we show that this link is channelled through aggressive earnings management and ambiguous annual reports. Therefore, managerial ambiguity can serve as an early warning signal of information obfuscation, which can eventually lead to stock price crashes. As a quasi‐natural experiment, we use the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. This policy lowered the regulatory requirements and oversight for a specific group of large banks. The results of a difference‐in‐differences analysis support our baseline findings and add to the ongoing debate on the roots of the 2023 banking crisis. Therefore, our findings can be informative to market participants, regulators and policy makers.

Bank liquidity creation, loan concentration and liquidity risk: a comparative analysis of dual banking system

Purpose Keeping in view the robust growth of Islamic banking around the globe, this study aims to comparatively analyze the association between liquidity creation and liquidity risk for Islamic banks (IBANs) and conventional banks (CBANs) in Pakistan and Malaysia over a period of 2004–2021. The moderating role of bank loan concentration on the aforementioned relationship is also studied. Design/methodology/approach Regression estimation methods such as fixed effect, random effect and generalized least square are deployed for obtaining results. Liquidity creation Burger Bouwman measure (cat fat and noncat fat) and Basel-III liquidity risk measure (liquidity coverage ratio) are also used. Findings The results give us insight that liquidity creation is positively and significantly related to liquidity risk in both IBANs and CBANs of Pakistan and Malaysia. This relationship has been moderated negatively (reversed) and significantly by credit concentration showing the importance of risk management and loan portfolio concentration. Practical implications It is analyzed that during the process of liquidity creation, IBANs in Pakistan faced more liquidity risk for both on and off-balance sheet transactions in the presence of moderation of loan concentration than IBANs in Malaysia necessitating strategic policy-making for important aspects of liquidity risk management and loan concentration while creating liquidity. Originality/value Such studies comparing IBANs and CBANs comparison keeping in view liquidity creation, liquidity risk and loan concentration are either limited or nonexistent.

The cumulative prospect theory and fund flows in emerging markets

ABSTRACT This study is the first to examine the efficacy of the Cumulative Prospect Theory value of the past return (CPTV) to explain fund flow in emerging markets funds by considering the impact of fund managers’ characteristics and behavioural biases on fund investors’ investment decisions. Besides, this study also investigates the impact of fund investors’ ability to identify fund managers’ skills. The findings suggest that CPTV has a significant and positive association with subsequent fund flow and emerging market funds’ performance. Notably, the study documents a negative relationship between fund flow and fund size and also highlights that newer funds generate greater fund flows. Furthermore, the findings indicate that investors investing in emerging market funds tend to behave differently, allocate money for alpha, and avoid giving distorted income for factor-related returns to fund managers. The results demonstrate that managers’ skill and portfolio concentration decision affects fund flow and CPTV relationships. The findings illustrate that fund managers who concentrate their portfolio and invest in high CPTV stocks tend to generate higher fund flow than their diversified counterparts.

Indian institutional investor's portfolio concentration decision: skill and performance

PurposeThis study examined Indian institutional investors' holding data to understand their investment strategy (Portfolio Concentration/Diversification) and explored whether their skills were associated with their portfolio strategy and performance. The study introduced a new proxy to identify skilled investors by forecasting abnormal returns. Moreover, the study also highlighted where skilled Indian investors put their money for long-term investment.Design/methodology/approachThis study measures portfolio concentration based on the number of holdings, the Hirschman–Herfindahl index (HHI) and benchmarks adjusted industry concentration. The study introduced a new proxy to identify skilled investors. We measured Investors' performance with the help of Carhart's four factors model and examined the relationship between variables through various regression models.FindingsThe study concluded a negative relationship between portfolio concentration and performance. However, skilled Indian investors get rewards from portfolio concentration decisions. It was found that skilled investors with few stocks and an industry concentration in their portfolio show a positive association between concentration and fund performance. Additionally, this study found Indian investors showing their faith in the financial sector for long-term investment.Originality/valueThis study examined Indian institutional investors' portfolio concentration strategy and introduced a new proxy to measure investors' skills.

Capital regulation induced reaching for systematic yield: Financial instability through fire sales

Credit rating-based capital regulation induces financial institutions to take on additional systematic risk. In this paper, we uncover interconnected channels through which this systematic risk hoarding affects financial stability using a proprietary ECB bond holdings dataset. First, banks and insurance corporations effectively reduce their capital buffers by hoarding bonds with high systematic credit risk. Second, this hoarding increases the portfolio concentration of credit rating-constrained and unconstrained financial institutions. Third, in addition to the general tendency of regulated financial institutions to fire sale bonds after rating downgrades, we reveal even larger fire sales precisely when their regulatory advantages of reaching for systematic yield disappear. Using a shock in capital regulation, we establish this causal relationship between the severity of fire sales and the tendencies of regulatory-constrained financial institutions to seek bonds with high systematic credit risk. Such systematic risk hoarding reduces capital buffer by an additional 16% in economic downturns.

Analisis Portfolio Concentration dan Insurance Leverage terhadap Kemampulabaan Perusahaan Asuransi yang Tercatat di Bei Tahun 2009-2021 dengan Mediasi Struktur Modal


 
 
 
 
 
 
 
 
 
 
 
 
 Among the various types of risks, the probability that most often occurs is operational risk, including insurance companies in Indonesia. This study aims to analyze and examine the effect of operational risk based on portfolio concentration and insurance leverage on the profitability of insurance companies with capital structure moderation factors. Data was obtained from the Indonesia Stock Exchange between 2009-2021, using the Structural Equation Model and Path Analysis method approaches. The first result of the study is that capital structure has a negative influence on the profitability of insurance companies, but not significantly. Second, the positive relationship between operational risk to capital structure, or capital structure is also positively influenced by operational risk significantly. Third, the capital structure mediates negatively the effect of operational risk on the profitability of insurance companies.
 
 
 
 
 
 
 
 
 
 
 
 

Active Management in Polish Domestic Treasury Bond Funds

Theoretical background: An increase in the interest in passive investing has been one of the most important trends on financial market over the last two decades. However, passive portfolio management is not limited to index funds and passive exchange-traded funds (ETFs). Despite the declared active approach to investing, in practice some active fund managers construct portfolios whose structure is quite similar to the index (usually a fund benchmark). Simultaneously, these funds charge relatively high fees, inadequate to the involvement in the investment process. In order to estimate the scale of this phenomenon, the activity and investment style of actively managed funds are examined. Purpose of the article: The main aim of the paper is to determine the degree of active approach to portfolio management by domestic Treasury bond funds investing in the Polish currency. Specific objectives include examining the relationship between the level of the fund’s active management and the size of the fund (assets under management) as well as the investment portfolio concentration. Research methods: In the quantitative study, the portfolio based measure of management activity, commonly used in the subject literature, was applied (adjusted to the bond fund), i.e. bond-level active share ratio. Moreover, to assess the portfolio concentration of the funds from the research sample, two measures were calculated: concentration ratio (CR5) and Herfindahl–Hirschman Index (HHI). Main findings: The results of the study have proved that a majority of the investigated domestic Treasury bond funds manage their portfolios in an active manner. Additionally, the research has shown that the funds managing larger assets, with a low degree of portfolio concentration, are characterized by relatively lower values of the active share ratio, i.e. their portfolios are relatively passively managed.

Concentrated Holdings by Funds: Putting All Your Eggs in the Same Basket

Diversification is a fundamental principle for investors when forming a portfolio. When investing in mutual funds and exchange-traded funds (ETFs), purchasing a single fund comes with the benefit of indirectly holding a large number of securities; however, many funds are not as diversified as some may expect. This article documents the large concentration of portfolio holdings of many funds. The degree of concentration varies based on fund investment objective, size, and structure. High levels of concentration often are tied to managers making active bets on the portfolio weights of holdings. This concentration relates to higher idiosyncratic risk (risk originating from factors tied to a specific security or small group of assets) and, for sector and style funds, greater market risk exposure. Even though many funds make large bets on the same stocks and have overlapping holdings, a strategy of investing in multiple funds with a similar objective can often lead to much lower portfolio concentration and reduces idiosyncratic risk.

주가지수의 시간 가변적 샤프-최적 포트폴리오와 포트폴리오 성과 평가지표

This paper asks three questions. Whether can KOSPI be mimicking a Markowitz efficient portfolio? How well can stock indexes function in the view of portfolio performance variables in case that a stock index has the number of comprising stocks in its name? What is the relation between portfolio performance variables and portfolio diversification variables? Sharpe ratio, Trenyor ratio, Jensen alpha, and Information ratio are considered as portfolio performance variables while Cumulative ratio, the Hershman-Herfindahl index, the Gini index, and the Hall-Tideman index are regarded as portfolio concentration variables. Static panel regression methodology is adopted. The ranks of stock indexes are different depending on daily, weekly, and monthly portfolio performance variables. There is little consistent relation between portfolio concentration variables and Sharpe ratio and Treynor ratio in any cases of daily data, weekly data, and monthly data. However, Jensen alpha and Information ratio show consistent relation with portfolio concentration variables. It is hard to understand little relation between Sharpe (Treynor) ratio and portfolio concentration variables because portfolio concentration relates with the composition of portfolio, leading to the performance of portfolio.

Portfolio Concentration and Stock-Specific Risk

In this article, the authors establish a connection between the effective number of portfolio constituents and the ex ante ratio of specific to total portfolio risk. Portfolios with a higher effective number of constituents have lower specific risk, and the decay follows a power law. An easy rule of thumb is that doubling the effective number of constituents approximately halves the proportion of stock-specific risk. The authors investigate the proportion of specific risk of the S&P 500 Index and find that in the period 2002–2022 the S&P 500 portfolio had a proportion of specific risk below the expected range, except for the post–COVID-19 period and that the ratio was never abnormally high.

Fund ESG performance and downside risk: Evidence from China

Whether responsible investing reduces portfolio risk remains open to discussion. We study the relationship between ESG performance and downside risk at fund level in the Chinese equity mutual fund market. We find that fund ESG performance is positively associated with fund downside risk during the period between July 2018 and March 2021, and that the positive relationship weakens during the COVID-19 pandemic. We propose three channels through which fund ESG performance could affect fund downside risk: (i) the firm channel in which the risk-mitigation effect of portfolio firms’ good ESG practices could be manifested at fund level, (ii) the diversification channel in which the portfolio concentration of high ESG-rated funds could amplify fund downside risk, and (iii) the flow channel in which funds’ better ESG performance may attract greater investor flows that could reduce fund downside risk. We show evidence that the observed time-varying relationship between fund ESG performance and downside risk is driven by the relative force of the three channels.

The effects of institutional investors on firms' green innovation

AbstractStakeholder theory suggests that institutional investors, as firms' vital stakeholders, might play a crucial role in influencing firms' green innovation. Considering both the shareholding and portfolio characteristics of institutional investors, we investigate the effects of different types of institutional investors with various supervisory motivations and governance capabilities on firms' green innovation. Importantly, we also explore which types of institutional investors become the driving force behind firms' green innovation. Furthermore, we consider how various aspects of financial and social benefits as contingencies affect the relationship between different types of institutional investors and firms' green innovation. Based on 5473 observations of Chinese manufacturing firms from 2013 to 2019, we find that, when considering institutional investors' effects on firms' green innovation, it is better to simultaneously consider both the shareholding and portfolio characteristics of institutional investors than to consider only one or the other. Dedicated institutional investors with more shareholding independence and higher portfolio concentration are positively associated with green innovation and are the driving force behind it, while transient institutional investors are not. However, institutional investors' effects on green innovation will change because of contingencies related to firms' financial and social benefits, generally presenting the characteristics of “pursuing benefits and avoiding risks.” Specifically, dedicated institutional investors promote green innovation for firms with satisfactory financial and social benefits to pursue long‐term benefits but do not have significant effects on the green innovation of firms with general or unsatisfactory financial and social benefits. By contrast, transient institutional investors are inclined to hinder green innovation for firms with unsatisfactory financial and social benefits to avoid short‐term risks; at the same time, they have insignificant effects on the green innovation of firms with satisfactory or general financial and social benefits.

Green credit policy and the net value crash risks of fund holding heavily polluting enterprise stocks: a quasi-natural experiment.

Based on the data of China's open-end stock funds and partial stock funds from 2009 to 2020, we take the implementation of green credit guidelines (GCG) as a quasi-natural experiment and investigate the impact of green credit policies on the net value crash risks of fund holding heavily polluting enterprise stocks. The results show that green credit policies will significantly increase the net value crash risks of fund holding heavily polluting enterprise stocks. Green credit policies increase the net value crash risks of fund holding heavily polluting enterprise stocks by increasing investor redemptions. Further tests show that better fund performance and higher portfolio concentration weaken the positive impact of green credit policies on the net value crash risks of fund holding heavily polluting enterprise stocks, and higher proportion of institutional investors strengthens the positive impact of green credit policies on the net value crash risks of fund holding heavily polluting enterprise stocks. This study supplements the literature on green credit policies and funds, and provides policy guidance for regulators.

Do more concentrated supplier portfolios benefit firm innovation? The moderating roles of financial slack and growth opportunities

PurposeFirms are increasingly depending on supplier portfolios in the quest for firm innovation. However, whether concentrated supplier portfolios are beneficial to innovation remains highly disputed. This study aims to investigate the effect of supplier portfolio concentration on firm innovation and the contingencies that shape this effect.Design/methodology/approachThe authors build on the knowledge search view to theorize a U-shaped effect of supplier portfolio concentration on firm innovation and further propose that the U-shaped effect is contingent on financial slack and growth opportunities. The authors collected panel data from 1,320 manufacturing firms in China. The negative binomial regression analyses were performed to test the hypotheses.FindingsSupplier portfolio concentration has a U-shaped effect on firm innovation. This U-shaped effect is weakened and flipped by financial slack but strengthened by growth opportunities.Originality/valueThe findings extend current understandings of the influence of supplier portfolio on firm innovation by clarifying the U-shaped effect of supplier portfolio concentration on innovation and the circumstances under which supplier portfolio concentration is more effective for firm innovation.

ANALISIS PORTOFOLIO KREDIT, RISIKO, DAN RETURN BANK UMUM KONVENSIONAL

This study aims to determine the credit portfolio strategy (focus or diversification strategy) based on the economic sector in conventional commercial banks grouped by business activity (BUKU) in the period January 2016 - December 2018 and analyze the effect of credit portfolio concentration and credit risk on rates of return. This study uses secondary data obtained from Indonesian Banking Statistics at the Financial Services Authority (OJK). This study used 4 samples, namely BUKU I, BUKU II, BUKU III, BUKU IV. Bank return as dependent variable was measured by Return on Assets (ROA) whereas Concentration of Credit Portfolio as independent variable was measured by the Herfindahl-Hirschman Index (HHI). The mediating variable (Credit Risk) was measured by Non-Performing Loans (NPL). This study used panel data regression with fixed effect model to test direct effects and Sobel Test to test indirect effect. The results showed that the concentration of the credit portfolio had a positive effect on credit risk, while credit risk had a negative effect on return. In addition, the mediating role of the credit risk variable is not proven to affect the effect of the credit portfolio and credit risk. In conclusion, the credit portfolio concentration strategy in certain sector can increase credit risk so that it tends to reduce the rate of return. Thus, this research suggests that banks need to diversify their credit portfolios to minimize credit risk.an risiko kredit.

Factores del riesgo crediticio en una cooperativa de ahorro y credito, en la emergencia sanitaria de la COVID-19

The Financial system is a fundamental component of the national economy which is made up of public and private financial institutions, and its purpose is focused on financial intermediation. During the COVID-19 health emergency, the exposure of the financial system to the materialization of the credit risk was practically inevitable. In consequence, this work was developed to identify the credit risk factors of a credit union from segment 1 in the context of the pandemic. Being a qualitative, non-experimental, descriptive and transversal research, for the data collection, not only a structured survey was applied to the members but also an interview to the executives of the institution. In addition, through fieldwork, documentation was analyzed, the one which provided valuable information and was complemented with an exhaustive bibliographic review. The results reveal that internal and external credit risk factors have increased significantly. The internal ones are evidenced in: low operability of the banking core, deficiency in credit origination, portfolio concentration, limited recovery management and lack of knowledge about credit card policies. The external ones are determined by: the loss of employment of the members, suspension of school activities, mobility restrictions at national level, and an impending reduction of the family income. In this sense it is concluded that, the credit union under study did not take the necessary measures to mitigate in a timely manner the internal credit risk factors and reacted somewhat slowly to the external credit risk factors during the COVID-19 pandemic.

Fund Concentration: A Magnifier of Manager Skill

Investors who believe an active manager has insights or forecasts with the potential to earn higher relative returns may look for the manager to concentrate their portfolios. Because foresight is imperfect and correct forecasts will lead to more favorable outcomes and incorrect forecasts to less favorable outcomes, this analysis seeks to explore the impact of decisions to increase concentration on performance. We used portfolio sorts, standard OLS regression methods, and quantile regression methods to test the effect of portfolio concentration in various ways. We found that concentration has a significant convex relationship with the absolute value of relative returns. That is, as the effective number of holdings increases, its association with positive and negative relative performance diminishes. Additionally, we find that increasing concentration has a pronounced positive impact on performance for outperforming funds; the opposite is true for underperforming funds. Most importantly, higher levels of concentration generally hurt the poorly performing funds more than it helps the outperforming funds. For investors and gatekeepers who focus on holdings-based measures of concentration, the findings show that you can’t just look at holdings-based measures of concentration without considering industry exposures.

Benchmark effects from the inclusion of Chinese A-shares in the MSCI EM index

We study the implications of benchmark indexing for emerging economies by focusing on the inclusion of Chinese A-shares in the MSCI EM index. Making use of a rich dataset on fund allocations and flows between 2015 and 2020, we document an escalating weight of Chinese exposure in mutual funds and an increasing concentration of fund portfolios. We rely on a Bayesian VAR model to show that the inclusion of A-shares in the MSCI EM index has fostered capital flows into China and has, at the same time, reduced the flows to the other emerging economies listed in the same index.