End Investors Research Articles

Shareholder Engagement and Custody Chains

Shareholder engagement has come to be seen to be pivotal to good corporate governance. It is therefore more important than ever for the mechanisms of shareholder engagement to be up to the important task they are meant to perform. Historically, these mechanisms have fallen short because of the capital markets’ necessary dependency on custody chains. Custody chains perform valuable functions but they also create a distance between the company and the end investor from which flows a significant risk of voting preferences and other important information not passing smoothly up and down the chain. Corporate governance is thus at risk of being distorted by process deficiencies. Changes to the operation of custody chains that were introduced by the EU’s flagship amended Shareholder Rights Directive II became operative in September 2020. This article is therefore among the first to draw on operational impact to assess the significance of these new measures. Experience has already demonstrated that while there have been some important advances, the regulatory changes are struggling on two levels: they have created new uncertainties within national laws; and they have failed to provide the necessary cross-border harmonization of key concepts. These are not issues that can be resolved effectively by technology or market workarounds on their own. There is a continuing need for legislative change to ensure that legal uncertainties do not act as a barrier to further technology-driven market standardization and innovation.

Changes in the global investor base and the stability of portfolio flows to emerging markets

The role of mutual funds in intermediating capital flows to emerging markets has grown, and the composition of types of funds has changed. Based on insights from the literature, we hypothesize that due to behavior of end investors, mutual fund flows are more sensitive to push- and pull factors when the assets held by funds are less liquid and the end investors are smaller, and when end investors can purchase or redeem funds more easily. Our empirical results based on fund-level asset allocation data across emerging markets are largely consistent with the hypotheses. Particularly, we find robust evidence that bond fund flows are more sensitive to pull- and push factors than equity fund flows. Since the share of fund types with higher sensitivities has tended to rise, the sensitivity of overall fund flows has likely increased. Our result also suggests that bond fund managers amplify selling pressure from end investors.

Measuring Exposure for Limited Partnership Funds

Measuring the exposure to limited partnership funds investing in private assets is a key challenge to multi-asset class investors. It arises from the long time lags between milestone events: the commitment to the fund, the capital calls, and returning capital to the fund’s investors. The task is further complicated by the dual perspective of the portfolio of the fund as seen through the prism of the end investor or the manager. This article explores the variety of existing and potential measures that address this challenge, comparing their appropriate usage and potential adverse effects. The goal is to provide a neutral and multi-faceted view to improve investment decision-making.

ВИЗНАЧЕННЯ ФАКТОРІВ, ЩО ВПЛИВАЮТЬ НА ТЕРМІНИ УТЕПЛЕННЯ ФАСАДІВ БАГАТОПОВЕРХОВИХ БУДІВЕЛЬ

The article is devoted to the definition and analysis of the main factors influencing the terms of insulation of the facades of multi-storey buildings. Excellent characteristics of insulation are considered, a classification of factors is proposed. All factors are divided into 4 main groups: organizational and technological, natural and climatic, space-planning and constructive. Effective methods for obtaining an assessment are given - an expert assessment. The paper presents the essence of the method of peer review, which consists in the development of a modern algorithm for conducting expert reviews on the example of insulation of the outer walls of multi-storey buildings. The main principles of applying the method of expert assessments, methods of selecting experts, mathematical formulas for calculating the required indicators, and criteria for determining the reliability of the results obtained are presented. Calculations of indicators influencing the choice of the most significant factors are given. As a result of calculations based on expert assessments, it was found that the greatest influence on the terms of insulation of facades of multi-storey buildings: methods of organizing work; the complexity of the forms of the facade; design features.
 The modernity of this article is beyond doubt, since from year to year, despite the economic and political situation, the number of insulated houses is growing. This trend is driven by significant demand from end investors for residential and commercial real estate.

Mid-Day Call Auctions

In illiquid and fragmented limit order book markets, asynchronously arriving buyers and sellers have a coordination problem. This problem is particularly strong mid-day, when trading is generally thin. We evaluate a market structure reform at Nasdaq Nordic, where the continuous trading session is replaced mid-day by a five-minute call auction. We find that the mid-day call auction works as a coordination device, reducing transitory price impact. The call auction attracts end investors rather than intermediaries. Stocks with greater end investor flows show stronger benefits of the call auction. The results indicate that mid-day auctions can improve continuous markets.

The Role of Labels in Green Finance: Construction and Regulation of a Label Market in France

A dozen of green and sustainable labels have emerged on the financial markets of the Member States of the European Union since the creation of a first label in 1997 in France, allocated to nearly 1,360 financial products, demonstrating a quantitative success, especially in France. This article analyzes the development of such green and socially responsible labels in Europe over the past decades , their construction dynamics, and questions the real benefits of a proliferation of labels in this industry. Does the multiplicity of factors contributing to the development of labels achieve the desired end or does it encumber the market with loud but uncertain signals? While household savings are at their highest and there is a demand for financing the ecological transition, does the proliferation of labels not complicate the readability of the market ? We show that, instead of simplifying the choice of agents, the multiplication of labels tends to increase the noise provided by each of the quality signals and deteriorate confidence. Economic agents have less interest in benefiting from a generic label but are looking for less demanding labeling at a lower cost. The whole system can therefore play in a counterproductive way, each actor minimizing the intrinsic effort provided. As the number of labels grows, the information asymmetry grows and end investors may therefore turn away from labeled products. Only regulator can counter this trend.

Construction quality management

Improving the quality of construction products is a natural process that reflects the objective trend in the development of social production. It is due to the essence of market relations, considering quality as the main measure in the general perception of supply. A significant impetus to this process is given by quality management, which directs participants in the construction industry to create products that meet all the requirements.The right choice of management methods and tools enables successful implementation of projects, which in turn directly affects their competitiveness. The quality of construction products, as well as the quality of building (finishing) materials, as well as construction technologies, including design and other engineering solutions, should be much higher than the average formed. The most important function of quality management of construction products is to encourage construction industry participants to improve the quality characteristics of the products created. The managerial influence not only promotes high quality construction, but also adequately responds to all developments in the investment and construction sphere: organizational, structural, financial, technical and other changes.The article considers such a parameter of the project as quality, compares the experience of implementing the quality management system in domestic construction organizations and construction organizations of some foreign countries. The focus is on the most common methods and programs aimed at improving product quality.A study of domestic and foreign quality management and control systems has shown that the quality management and control system in foreign countries is organized more clearly and effectively than in our country, and certainly positive experience should be taken into service by our construction (and not only) companies, which is only to increase their competitiveness. As a result, the winners will be all participants of the construction project: the consumer of the end result, the customer-developer, investor, insurance companies, authorities and others.

Repurchase agreements and the (de)construction of financial markets

The safety of repurchase agreements (repos) depends on the neoclassical premise that markets are reliable sources of liquidity; repos in practice disprove the theory by generating collateral calls, collateral sales, liquidity events, and liquidity-driven losses for repo-borrowing funds and their end investors. As repo-type lending now dominates money markets, borrowers’ self-protective preference for ‘safe assets’ as collateral has distorted financial markets, disrupting private investment, and economic performance. Using a balance sheet approach this paper explains the liquidity-supporting role of the traditional banking system and contrasts it with the liquidity-demanding repo-based financial system. The paper also argues that contractual structure determines the balance of power in private sector loans, that no private loan is ‘safe’ for both borrower and lender, and that repo has shifted the balance of safety decisively in favour of lenders.

The Promise of Blockchain Technology for Global Securities and Derivatives Markets: The New Financial Ecosystem and the \u2018Holy Grail\u2019 of Systemic Risk Containment

Weaknesses in investor control over their investments and in warehousing systemic risk in modern Financial Market Infrastructure (FMI) are the result of a combination of market failures and of structural flaws deeply ingrained in modern financial markets. Yet the utility of complex FMI comprising long custodial chains and large global Central Counterparties (CCPs) for the operation of modern markets is not seriously disputed. The change in the technology paradigm with the introduction of DLT systems for securities and derivatives FMI can increase investor control, the efficiency of risk management and, to some extent, augment the distribution of systemic risk. It can thus create a more diverse and resilient financial ecosystem. This cross-disciplinary paper identifies a multitude of reasons that favour a paradigm shift in FMI technology. It also sketches a comprehensive blockchain-based framework for the development of permission-based platforms for derivatives clearing and settlement and the handling of liquidity shortages within DLT systems. Arguably, the impact of technological change should lead to a reduction of industry rents for the benefit of end investors and of the end users of finance (entrepreneurs and businesses) enhancing market welfare. Therefore, the use of blockchain technology in FMI can transform the structure and future direction of the financial services industry as a whole.

Towards a Global Financial Register? The Case for End Investor Transparency in Central Securities Depositories

The perception of rising wealth inequality has led to calls for the creation of a central database on worldwide ownership of financial assets, in other words a ‘global financial register’. Economists Thomas Piketty and Gabriel Zucman have proposed that this register be built using the databases of the large Western central securities depositories (CSDs), such as DTC, Euroclear, and Clearstream. The work of these economists having been extensively echoed, this article examines the viability of their proposal regarding CSDs. At present, most CSDs in advanced economies are based on ‘street name’ registration or ‘omnibus’ accounts, ie they do not identify the end investors of securities. The CSD model evolved in that way because of the depth of the intermediation chain, growth in cross-border securities investment and continuing regulatory fragmentation along national lines. Yet at the same time, a number of arguments militate in favour of end investor transparency in these institutions. Transparent CSDs already exist in smaller Western economies, as well as in some of the largest emerging market economies. End investor transparency would produce benefits in the area of corporate governance, by facilitating direct corporate communications. Perhaps most importantly, it would respond to important public interest objectives already being pursued in the fields of taxation, anti-money laundering and sanctions compliance. From a normative standpoint, therefore, this article presents the case for greater transparency in financial market infrastructure, through end investor account segregation in the CSDs.

The state of play of MIFID II on fund distribution

The implementation of MIFID II has been underway for many years. This significantly affected the distribution of financial products to investors within the European market. The relationship between the manufacturers of the products and distributors has been tightened and now requires more oversight and understanding, as well as new exchanges of information and data. One of the main aims is to provide transparency of the costs borne by investors for the products they hold; this has led to the disclosure of product costs as well as the commissions received by the distributors to the end investors, both prior to and on an ongoing basis. The industry has been working together to standardise these areas and on the whole, this has been a success; but, this has brought about a number of new issues and will need further refinement to be fully understood by a typical retail investor. While the regulation is live, there remain areas that need to be addressed during 2018 to resolve ongoing operational processes as well as the oversight of distributors, to ensure that products are not sold via channels or to investors that are not suitable.

The Promise of Blockchain Technology for Global Securities and Derivatives Markets: The New Financial Ecosystem and the 'Holy Grail' of Systemic Risk Containment

Weaknesses in warehousing systemic risk in modern Financial Market Infrastructure (FMI) are the result of a combination of market failures and of structural flaws deeply ingrained in modern financial markets. The same applies to investor control over their investments over the custodial chain. Yet the utility of complex FMI comprising long custodial chains and large global Central Counterparties (CCPs) for the operation of modern markets seems undisputable. A shift in the technology paradigm with the introduction of DLT systems for securities and derivatives FMI, could, however, increase investor control, the efficiency of systemic risk distribution, and create a more diverse and resilient financial ecosystem. This cross-disciplinary paper explores all these claims and identifies a multitude of welfare-enhancing reasons favouring a paradigm shift in FMI technology. It also proposes a comprehensive blockchain-based framework for the development of permission-based platforms for derivatives clearing and settlement and the handling of liquidity shortages within DLT systems. Arguably, the impact of technological change will lead to a reduction of industry rents for the benefit of end investors and end users of finance (entrepreneurs and businesses) enhancing market welfare. It may also signal a shift in market behaviour from short-term/speculative finance towards long-term/committed finance. Therefore, the use of blockchain technology in FMI can prove genuinely transformative for the structure and future direction of the financial services industry as whole.

Corporate power is corporate purpose I: evidence from my hometown

This paper considers a rather tired argument in corporate governance circles, that corporate laws only giving rights to stockholders somehow implicitly empower directors to regard other constituencies as equal ends in governance. By continuing to suggest that corporate boards themselves are empowered to treat the best interests of other corporate constituencies as ends in themselves, no less important than stockholders, scholars and commentators obscure the need for legal protections for other constituencies. As a case study, this paper examines what happened when an activist investor came to DuPont, illustrating how its board knew that they were expected to make their end investors’ best interests, even if that hurt other constituencies. This isn’t a story about bad people, but a reminder to those genuinely concerned for non-shareholder constituencies to face reality and support changes in the power dynamics affecting corporate governance that make regard for non-shareholder constituencies an obligation for business.

Repurchase Agreements and the De(con)struction of Financial Markets

The safety of repurchase agreements (repos) depends on the neoclassical premise that markets are reliable sources of liquidity; repos in practice disprove the theory by generating collateral calls, collateral sales, liquidity events and liquidity-driven losses for repo-borrowing funds and their end investors. As repo-type lending now dominates money markets, borrowers’ self-protective preference for ‘safe assets’ as collateral has distorted financial markets, disrupting private investment, and economic performance. Using a balance sheet approach this paper explains the liquidity-supporting role of the traditional banking system and contrasts it with the liquidity-demanding repo-based financial system. The paper also argues that contractual structure determines the balance of power in private sector loans, that no private loan is ‘safe’ for both borrower and lender, and that repo has shifted the balance of safety decisively in favor of lenders.

Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies

The value premium’s persistence and magnitude run counter to the behavioral explanation of the value anomaly. How can investors continue to make the same widely recognized mistake? By examining the difference between mutual funds’ reported buy-and-hold or time-weighted returns, and the average dollar-weighted returns or IRRs end investors earn, the authors quantify the consistently negative effect of value investors’ market-timing decisions: from 1991 to 2013, value mutual fund investors underperformed the funds they invested in by 131 basis points. Their analysis also reveals that investors in growth, large-cap, and small-cap funds are similarly prone to unproductive allocation timing. They also find that less sophisticated investors tend to make poorer timing decisions. Investors who hold funds with high expense ratios had larger return gaps than those who chose less costly funds, and investors in retail funds underperformed by a greater margin than those who qualified for institutional share-class funds. The authors suggest that, by giving away the excess return, value investors themselves finance the value premium and ensure its continuance. Financial education may help individual investors refrain from trading their funds in a counterproductive fashion.

How Important Are Foreign Ownership Linkages for International Stock Returns?

We derive a foreign ownership return as the weighted average return of foreign stocks that are connected to a stock through common ownership. The foreign ownership return is of similar economic significance as traditional country and industry factors in explaining international stock returns. It is not related to omitted fundamentals or wealth effects but shifts substantially around ADR and index listings when the investor habitat changes. A decomposition shows that the foreign ownership return is driven by active reallocations of global institutions as opposed to fund flows from end investors. Our findings have important implications for international portfolio diversification.

Intermediaries as Information Aggregators: An Application to U.S. Treasury Auctions

According to most theories of nancial intermediation, intermediaries diversify risk, transform maturity or liquidity, and screen or monitor borrowers. In U.S. Treasury auctions, none of these rationales apply. Intermediaries submit their customer bids without transforming liquidity or maturity, and they do not screen and monitor borrowers or diversify scal policy risk. Yet, most end investors place their Treasury auction bids through an intermediary rather than submit them directly. Motivated by this evidence, we explore a new information aggregation model of intermediation. Intermediaries observe each client’s order ow, aggregate that information across clients, and use it to advise their clients as a group. In contrast to underwriting theories in which intermediaries, by acting as gatekeepers, extract rents but reduce revenue variance, information aggregators increase expected auction revenue, but also make the revenue more sensitive to changes in asset value. We use the model to examine current policy questions, such as the optimal number of intermediaries, the eect of non-intermediated bids, and minimum bidding requirements.

Fallacies of Risk Control

This paper demonstrates how risk control as applied to popular investment products can be based on a fallacy. In scope are option-based capital protected products and rules-based portfolio insurance products. In case of structured products risk control shifts the option’s volatility risk from the product provider to the end investor. The investor is presented a different product, for better or for worse, and not an improved version of the “base” product. Adding risk control to the risky asset of portfolio insurance leaves the portfolio allocation unchanged if, for good reasons, market exposure is already inversely linked to volatility. The investor receives nothing else but the “base” product, be it in a commercially more appealing presentation.

Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies

The persistence and magnitude of the value premium run counter to the behavioral explanation of the value anomaly. How can investors continue to make the same widely recognized mistake? By examining the difference between mutual funds’ reported buy-and-hold or time-weighted returns and the average dollar-weighted returns or IRRs earned by end investors, we quantify the consistently negative impact of value investors’ market timing decisions: over the 1991-2013 period, value mutual fund investors underperformed the funds they invest in by 131 basis points. Our analysis also reveals that investors in growth, large cap, and small cap funds are similarly prone to unproductive allocation timing. We additionally find that less sophisticated investors tend to make poorer timing decisions: investors who hold funds with high expense ratios had larger return gaps than those who chose less costly funds, and investors in retail funds underperformed by a greater margin than those who qualified for institutional share class funds. We suggest that, by giving away the excess return, value investors themselves finance the value premium and ensure its continuance. Financial education may help individual investors refrain from trading their funds in a counterproductive fashion.

The Self-fulfilling Prophecy of Popular Asset Pricing Models

The assumption that asset prices are determined by the efforts of end investors to maximize intertemporal utility supports a pricing theory that is both elegant and intuitive. Unfortunately, the assumption is counterfactual. End investors, with few exceptions, lack the capacity to behave in a fashion consistent with the theory. More to the point, they don’t try. Instead, investment decision-making is delegated. Thus, it is important to understand the investment management ecosystem. Is it a simple pass-through mechanism? We do not believe so and argue, instead, that the lack of alignment implies the cross-section of asset returns is significantly influenced by active money managers and deviates from the predictions of the consumption-based model. Using a simple thought experiment, we demonstrate that the widely adopted discounted cash flow model is likely both to drive prices and to determine the cross section of average returns. This leads to a self-fulfilling feedback loop in which once an asset pricing model is adopted by active managers as a means of estimating the discount rate, it becomes a determinant of expected returns.