Institutional Investment Management Research Articles

Forbearance in Institutional Investment Management: Evidence from Survey Data

We survey 218 institutional investors from 22 countries representing over $4.1 trillion in AUM to understand the drivers of forbearance in the termination of external asset managers. Although asset managers are fired for a variety of reasons, including taking on too much or too little risk as well as organizational changes at the investment manager or institutional investor level, poor performance is by far the dominant cause. There is surprising tolerance for underperformance and holding periods for investment managers are unexpectedly long. Forbearance is important and we argue that performance evaluation should be multifaceted, akin to a Bayesian decision-maker who conducts continued due diligence and updates beliefs about returns with process information.

Forbearance in Institutional Investment Management: Evidence from Survey Data

Forbearance in Institutional Investment Management: Evidence from Survey Data

Factors affecting institutional investors to add crypto-currency to asset portfolios

As crypto-currency has been gained great attention in financial market, it becomes more popular among institutional investment managers’ portfolios. Thus this research makes a pioneering study to investigate the role of crypto-currencies in PE company portfolios and factors affecting the institutional investors’ investment intention in order to enhance the reliability of their investment products. Data were obtained from 253 multinational PE company investment managers who have bought and used crypto-currency. The findings suggest not only important roles or drivers but also the moderating roles of innovativeness on relationships between the investment intention and its antecedents. It suggests that price volatility doesn’t lower institutional investors’ confidence as long as the market can offer timely and accurate price change information to meet investors’ price consciousness. The result also identifies that crypto-currency with high familiarity and trust can be well-suited in institutional investors’ portfolios.

Beyond 'Going Dark': The SEC's 13F Proposal And Hedge Fund Activism

The Securities and Exchange Commission recently proposed eliminating quarterly disclosures for 90% of institutional investment managers. According to prominent lawyers, journalists, and industry players, the proposal will bolster hedge fund activists by allowing them to “go dark,” build up positions in companies in secret, and then “ambush” unsuspecting managers who will have no choice but to give in to their demands. This Essay challenges this “going dark” thesis. I argue that it exaggerates the likely effects of the SEC proposal, which may actually reduce the volume of hedge fund activism. I also argue that the “going dark” thesis misses a more significant potential cost of the proposal: reducing the long-term benefits derived from activism.

Commentary on the SEC's Proposed Reporting Threshold for Institutional Investment Managers

Commentary on the SEC's Proposed Reporting Threshold for Institutional Investment Managers

Producing investment returns at the margin of finance: A frontier talent proposition

Institutional investment management requires expertise. In the “war-for-talent”, co-located private sector financial institutions drive wages up, thereby side-lining resource-constrained public pension funds and forcing them to outsource their investment functions. This article develops a frontier talent proposition based on a case-study of an atypical and exemplary U.S. public pension plan that produces competitive investment returns at-a-distance (geographically and economically) from financial agglomerations by internally managing 75 bn USD of retirement assets on a tight budget. Combining labour market statistics and close-dialogue with 37 investment professionals, the case-study documents original comparative advantages of the periphery relative to financial agglomerations in talent recruitment. It contributes new insights on geographical differences in real wages and the quality of life of finance workers. Looking ahead, the article suggests the relevance of frontier talent to a larger set of financial institutions facing increasing difficulties to staff their organisations in top-tier financial centres.

Institutional investment management: An investor's perspective on the relation between turnover and performance

ABSTRACTThe main aim of this study is to analyse the relationship between turnover and performance in institutional investment management. For a sample of US equity mutual funds during the period January 1999–December 2014, we show that high-turnover funds do not beat low-turnover funds, since their performances are no different, or even significantly lower. Moreover, we show that investing in past high-turnover mutual funds provides investors with significantly worse results than investing in previously low-turnover funds. Investors aiming to enhance their risk-adjusted returns should therefore consider the turnover ratio level in their fund investment decisions.

Can Insider Trading Information be an Effective Tool for Investment Managers?

The Legend of Martha Stewart: Insider Trading For decades institutional investment managers and individual investors have searched for different ways to make outsized returns in the stock market. Finance theories were created by academics to suggest that this task is not possible because the market is efficient. However, as a scholar-practitioner, I have come to realize that Insider Trading disclosure data provides a unique information signal that can be used as an effect tool for identifying investments at the company level.

From Theory to Practice: The Collaborative Model for Investing in Innovation and Energy

Innovation and Energy are likely to be two of the most attractive investment themes in the coming years. The world is moving to an increasingly technical and digital age, and the search for renewable sources of energy intensifies as the detrimental impacts of climate change increase in frequency and magnitude. There are, however, structural deficiencies with existing market mechanisms that constrain large, long-term investors from looking to invest in these areas. The ‘Collaborative Model’ has emerged as a distinct model of institutional investment management that aims to re-orientate long-term investment capital more efficiently into long-term investments such as innovative companies and energy infrastructure. The Collaborative model requires an organizational mindset shift towards the long-term and centers around the importance of institutional investors to develop their social capital. We believe this can help build organizational capacity, improve knowledge sharing and ultimately form innovative, efficient vehicles for investing into the assets. From the implementation of the Collaborative model at the University of California Office of the Chief Investment Officer of the Regents, we illustrate how beneficiary organizations can leverage their unique organizational competitive advantages for finding the most efficient access points for investments in innovation and energy. We also show that through working together, having disciplined decision-making processes and thinking innovatively, the collaborative model is not restricted just to the largest and most sophisticated institutional investors.

Performance persistence in institutional investment management: The case of Chinese equity funds

This paper investigates the performance and persistence in performance of equity funds in China. We apply the capital asset pricing model (CAPM) and the Carhart four-factor model to examine 520 equity funds for an eleven-year period with 39,449 observations. To investigate persistence, the entire sample is divided into ten portfolios (deciles) on the basis of lagged one-year performance and then observed over the next 12 months. We find that equity funds in China outperform their benchmark market but do not find any evidence of persistence in the performance of equity funds. Top-performing (worst-performing) funds do not continue to perform well (worse) in the following year. Top-performing funds are younger and have lower expense ratios than the worst-performing funds. However, the size of the top-performing funds and the worst-performing funds show no significant difference. Our results suggest that past performance of equity funds is not predictive of future fund performance.

Fund Hiring Rules and Investment Firms

Investment manager firm concentration for traditional equity and fixed income strategies has grown as a result of the increase in large funds’ share of overall pension funds and is now increasing in hedge fund and private equity strategies. Funds’ practice of buying from the same few large providers at increasing rates runs contrary to their competition to produce alpha, as research demonstrates that smaller firms add more value. From the firm’s perspective, continuing to remain a small institutional investment management firm is a riskier business strategy. Small firms rationally desire growth, including additional products and mergers, to achieve the scale buyers require, contrary to specialized boutique business models.

The Global Financial Crisis and the Case for MEFAA Strategic Asset Allocation

Major institutional investment managers, such as, major hedge funds and large university endowments, have based their investment portfolios upon tactical asset allocation among multiple asset classes with low correlation with the goal of achieving superior risk-adjusted returns. However, during the current financial crisis, many of these asset classes experienced high degrees of correlation as they all decreased in value. In addition, many alternative asset classes not only decreased in value but also were illiquid in nature, impeding asset class re-allocation efforts. This paper examines a new strategic asset allocation framework called Monetary Environmental Flow Analysis™ (MEFA™) which can offer downside protection in such environments using only extremely liquid investment vehicles. The result over time is long-term returns comparable to equities but lower draw-downs in financial crisis environments. These strategies are tested over the period 1996-2014 with live signals for them from 2006 and 2007. Several of the strategies have been tested back to the 1970’s.

MEFAA Asset Allocation Strategies: Using Strategic Asset Allocation to Enhance Investment Returns and to Reduce Risk

Major institutional investment managers, such as, hedge funds and large university endowments, have based their investment portfolios upon tactical asset allocation among multiple asset classes with low correlation with the goal of achieving superior risk-adjusted returns. Until recently, this strategy has been extremely successful achieving compound annual returns over time of 10-15% with lower levels of volatility and superior risk-adjusted returns.However, during the current financial crisis, many of these asset classes experienced high degrees of correlation as they all decreased in value. It appears that in a global financial crisis, any asset classes that contain any form of market risk are quite linked. In addition, many alternative asset classes, such as, hedge funds and private equity not only decreased in value but also were illiquid in nature. This has impeded asset class re-allocation efforts.The Channel Capital Research Institute offers a new strategic asset allocation framework called Monetary Environmental Flow Analysis™ (MEFA™) which can offer downside protection in such environments using only Exchange Traded Funds (ETFs) and other extremely liquid investment vehicles. It utilizes basic tenets of asset allocation. However, it recognizes that many asset classes can be highly correlated in a downturn and offers the ability to allocate to riskless asset classes depending upon one’s goals and objectives. MEFA™ strategies offer the ability to create a customized framework for creating a portfolio based upon the specific risk-return tradeoff desired by the specific investor. The results over time are long-term returns comparable to equities but with lower drawdowns in financial crisis environments. These strategies are tested over the period 1996-2014.

Asset Allocation & the Global Financial Crisis: The Standard Case for the 50/50 Balanced Account and the Follow the Fedd Investment Strategies

Major institutional investment managers, such as large university endowments, have based their investment portfolios upon tactical asset allocation among multiple asset classes with low correlation with the goal of achieving superior risk-adjusted returns. Until recently, this strategy has been extremely successful achieving compound annual returns over time of 10-15% with lower levels of volatility and superior risk-adjusted returns.However, during the current financial crisis, many of these asset classes experienced high degrees of correlation as they all decreased in value. It appears that in a global financial crisis, any asset classes that contain any form of market risk are quite linked. In addition, many alternative asset classes, such as, hedge funds and private equity, not only decreased in value but also were illiquid in nature. This has impeded asset class re-allocation efforts.We examine the classic 50/50 balanced investment portfolio in comparison with fixed asset allocation portfolio in multiple asset classes. Despite the increased diversification, we find the investment performance to be quite similar. The reason is that many asset classes can be highly correlated in a downturn. Thus, riskless assets offer the only real protection in a severe downturn. The Follow the Fed® investment strategies offer the ability to enhance the performance of the classic 50/50 balanced portfolio in both positive and negative market environments. The results over time are long-term returns superior to the original 50/50 balanced portfolio. These strategies are tested over the periods 1996-2014 and in select cases 1970-2014 with live signals for them from 2006 and 2007.

What determines the allocation of managerial ownership within firms? Evidence from investment management firms

We show that the allocation of managerial ownership to individuals within firms varies depending upon the joint distribution of decision control and decision management rights. Using a unique dataset of institutional investment management firms, we show that ownership is higher for managers: with both executive and operational responsibilities; when benefits of cooperation are higher; and with large contributions to firm value. Consistent with career concerns, we find increases in a manager's ownership are associated with increases in unsystematic risk. Ownership dispersion within the firm is associated with the allocation of monitoring and operational roles and the potential benefits of cooperation.

What Determines the Allocation of Managerial Ownership Within Firms?

We show that the allocation of managerial ownership to individuals within firms varies depending upon the joint distribution of decision control and decision management rights. Using a unique dataset of institutional investment management firms, we show that ownership is higher for managers: with both executive and operational responsibilities; when benefits of cooperation are higher; and with large contributions to firm value. Consistent with career concerns, we find increases in a manager's ownership are associated with increases in unsystematic risk. Ownership dispersion within the firm is associated with the allocation of monitoring and operational roles and the potential benefits of cooperation.

Evolving the Investment Framework for Private Wealth Investment Management

While institutional investment management has evolved to become more sophisticated and performance driven, private wealth management has largely been neglected from an investment process perspective. Although similar to the institutional investment problem in many respects, the parameters specific to private wealth investment management mean than a direct application of institutional processes is not feasible. Further, the business model and organizational structure of private banks also needs to evolve, if enhanced investment processes are to be implemented. Several approaches are being currently tried to improve the investment proposition of private wealth management. We propose a revised framework for private wealth investment management, which we believe overcomes some of the challenges organizationally and from an investment standpoint, and allows better management of private wealth assets.

The Relationship Between Institutional Investment and Earnings Management

The emergence of corporate scandals at the end of the 20th and beginning of the 21th century raised doubts regarding the integrity of financial reporting and the soundness of firms' corporate governance practices. The practice of earnings management is considered to be one of the important causes of these scandals due to its harm to the transparency and quality of financial statements. The discretion exercised by managers in accounting result in agency costs arising from the mismatch between the goals and desires of the principle and the agent causing investors to make suboptimal decisions. The recent surge in institutional investors' shares and associated degree of activism increased their importance as an external control mechanism of corporate governance. Accordingly, the primary purpose of this study is to evaluate the role of these investors on earnings management and alignment of the interests of owners and managers within the context of agency theory. Consequently, two main hypotheses; namely, active monitoring and managerial myopia induced by institutional investors are tested by panel data analysis utilizing data belonging to the firms listed on Borsa Istanbul during the 7 year period between 2005 and 2011, inclusive. The absolute value of discretionary accruals obtained from the performance adjusted cross-sectional industry based accrual model proposed by Kothari, Leone and Wasley (2005) is used as the proxy of earnings management to evaluate whether the presence of institutional investors mitigate or stimulate managers' discretionary accounting practices. Additionally, further analysis is conducted to evaluate the existence of monitoring and clientele effects to better interpret the direction of the relationship between the associated variables of interest.

Towards the Next Generation of Performance Attribution for Institutional Investment Management

Proprietary information and data processing systems have become key competitive differentiators for investors in today’s complex financial marketplace; better systems provide better data, which, in turn, drive better investment decisions and superior investment performance. But while the best systems are multifaceted and touch all aspects of the investment organization (see Clark and Monk 2013), one component of such systems is increasingly important: the measurement and attribution of performance. Today’s leading investors view performance attribution as more than just explaining the past; it is seen as a tool for making better investment decisions in the future. Accurate, timely, and detailed attribution helps measure skill and sources of active return and can thus help strengthen investment teams and improve portfolio performance. In this brief article, we describe our experience at the Alberta Investment Management Corporation (AIMCo) in developing performance attribution as an investment management tool in the hope that it may become part of a broader institutional investor discussion on this topic.

Global Tactical Asset Allocation for Institutional Investment Management

The Alberta Investment Management Corporation (AIMCo) was established in 2008 to manage approximately C$70 billion on behalf of 26 pension, endowment, and government reserve funds in the Province of Alberta. The fund’s over-arching goal is to earn incremental return on risk over what our clients could achieve by passively implementing their policy asset mix with equity and fixed income index funds. One way to add return in excess of passive portfolios is through our Global Tactical Asset Allocation (GTAA) strategy. In this brief note, we provide a description of the ways in which AIMCo has developed and executed its GTAA process over the past few years. In so doing, we hope to offer some insights to other institutional investors that might be considering or preparing to launch a similar GTAA or tilting policy. We conclude that executing a successful GTAA requires developing world-class talent, systems, process and governance.