Portfolios Of Institutional Investors Research Articles

Institutional Investors and ESG Preferences

ABSTRACTResearch Question/IssueWe examine the effect of multiple environmental, social, and governance (ESG) scores on institutional investor ownership of firms and investor portfolio weightings. We are also the first to analyze the three individual components of ESG rankings to estimate the relative preferences of institutional investors.Research Findings/InsightsUsing a unique panel dataset covering US companies and institutional investor portfolios over the 2010–2019 period, we find that while investors are driven to add high‐quality ESG companies to their portfolios, there is a negative relationship with ESG when it comes to taking large ownership stakes. Furthermore, ESG scores are negatively related to the portfolio weightings of institutional investors, which raises concerns of greenwashing. Our analysis of individual ESG scores points to significantly larger effects of G scores in terms of holdings, and G is the only score with no negative impact on portfolio weightings. Finally, in support of systematic stewardship theory, top institutional investors allocate higher proportions of their portfolios to firms with high‐ESG ratings. Our results are robust to the use of a difference‐in‐differences analysis addressing endogeneity concerns.Theoretical/Academic ImplicationsThe findings in this paper offer important policy implications for institutional investors, managers, and policymakers. Given the ongoing debate on ESG scores, this paper shows the importance of examining greenwashing for investors who have a concern regarding the extent to which the valuation of assets might be influenced by unsupported sustainability claims. In addition, our study adds to the debate regarding ESG investing and stewardship theory.

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.

The performance of non-listed opportunity real estate funds in China

PurposeOpportunity real estate funds are an important style of real estate investing for institutional investors seeking nonlisted real estate exposure. Importantly, institutional investors have sought exposure to the China real estate market, often via opportunity real estate funds. This has been by a pure China opportunity real estate fund (100% China opportunity real estate) or by a pan-Asia opportunity real estate fund where China opportunity real estate was part of this pan-Asia opportunity real estate portfolio. Using two bespoke China opportunity real estate indices developed by the authors, this paper aims to assess the risk-adjusted performance and portfolio diversification benefits of China opportunity real estate in a mixed-asset portfolio over 2008–2020. It also highlights critical issues for institutional investors going forward to factor into their real estate investment decision-making for effective China real estate exposure.Design/methodology/approachThis paper develops two bespoke China opportunity real estate fund performance indices to assess the risk-adjusted performance and portfolio diversification benefits of China opportunity real estate funds in a mixed-asset portfolio over 2008–2020. An asset allocation diagram is used to assess the role of China opportunity real estate in a mixed-asset portfolio via both the non-listed and listed real estate investment channels.FindingsOver 2008–2020, China opportunity real estate exposure via pan-Asia opportunity real estate funds were seen to outperform pure China opportunity real estate funds. In both formats, China opportunity real estate funds were seen to have a significant role in a China mixed-asset portfolio across most of the portfolio risk spectrum; particularly compared to listed real estate exposure in China. On-going issues regarding real estate risk management in China will take on increased importance for institutional investors seeking China real estate exposure.Practical implicationsOpportunity real estate funds are an important style of real estate investing, often used by institutional investors to gain non-listed real estate exposure in a developing real estate market. This style of real estate investing has been popular with institutional investors seeking exposure to China real estate as part of the China economic growth dynamic. The results of this research highlight the importance of opportunity real estate investing in China, both via a pure China opportunity real estate fund and via a pan-Asia opportunity real estate fund. Based on this empirical analysis, China opportunity real estate exposure is seen to be more effective via a pan-Asia opportunity real estate fund than a 100% China opportunity real estate fund. A range of practical China real estate investment issues are also highlighted for the effective delivery of China real estate exposure for institutional investors going forward; this particularly relates to the on-going risk management for real estate investment in China.Originality/valueThis paper is the first empirical research analysis of the risk-adjusted performance of China opportunity real estate and its role in a mixed-asset portfolio. Using bespoke China opportunity real estate fund indices developed by the authors, this research enables empirically-validated, more informed and practical opportunity real estate investment decision-making regarding the strategic role of China opportunity real estate in an institutional investor's portfolio. It also highlights the importance of various facets of real estate risk management in China going forward.

The increasing importance of the alternate real estate sectors for institutional investors

The alternate real estate sectors (including healthcare, data centres, self-storage, university student accommodation and infrastructure) have taken on increased importance in recent years with institutional investors, as they have sought to broaden their real estate sector exposure. This has been driven by key real estate investment factors, including the changing global demographics, advances in technology and the impact of COVID-19. Importantly, this trend is expected to continue and has a major influence on real estate management and strategies by institutional investors going forward. Using a range of alternate real estate sectors across several countries (US, UK and globally) in the direct, non-listed and listed real estate spaces, this paper examines the risk-adjusted performance and portfolio diversification benefits of these alternate real estate sectors compared to the standard asset classes in the portfolios of institutional investors. The real estate management and strategic implications for institutional investors going forward are also assessed.

Institutional Investor Attention, Agency Conflicts, and the Cost of Debt

Using a new measure of shareholder inattention constructed from exogenous industry shocks to institutional investor portfolios, we find that firms with distracted shareholders are associated with a higher cost of debt. This effect is stronger for firms with more powerful CEOs, firms with higher information asymmetry, and those operating in less competitive product markets. Further testing suggests that the inattention-cost of debt relation is driven primarily by dual holders directly observing shareholder distraction. Our results are robust to controlling for inattention at the retail investor level and to other external monitors, including credit rating agencies, financial analysts, and Big 4 auditors. Overall, our evidence suggests that institutional shareholder inattention has an incrementally negative effect on bond pricing. This paper was accepted by Brian Bushee, accounting. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.4593 .

Integration of Environmental Factors into Portfolio Risk Assessment

The financial sector collectively cannot hedge all climate-related risks, and investors individually are unlikely to affect climate developments significantly. However, the financial sector can help channel savings into green projects and thus facilitate divestment from heavy-carbon-footprint producers. This article provides a novel framework for understanding climate-related adaptation, mitigation, and transition risks and outlines a method for valuing these risks in institutional investor portfolios. The authors’ proposed setup serves as a continuous call to action to long-term institutional investors to obtain accurate information on climate-related risks and develop appropriate frameworks for understanding these risks, regularly valuing them, and properly incorporating them into their investment decisions. <b>TOPICS:</b>ESG investing, tail risks, portfolio management/multi-asset allocation <b>Key Findings</b> ▪ This article provides a novel framework for understanding climate-related adaptation, mitigation, and transition risks. ▪ It outlines a method for valuing climate-related risks in institutional investor portfolios. ▪ It stresses the importance of integrating environmental factors in portfolio risk assessment by obtaining accurate information on climate-related risks and developing appropriate frameworks.

The Gold Exposure of Institutional Investors

What is the optimal weight of gold in an investment portfolio? Suggestions range from 0% to more than 20%, but there is no study that systematically investigates this issue. We analyze the gold holdings (gold ETFs) of institutional investors based on 13-F filings and find that 30% of all institutions have at least some exposure to gold in their portfolio, with an average percentage holding of 1.7% with large differences across institutions and over time. The results further identify key determinants of gold holdings and demonstrate that gold holdings positively affect the performance of institutional investor portfolios.

The Effect of Institutional Investor Portfolio Diversification on Corporate Diversification

We examine whether institutional investors' portfolio diversification affects corporate diversification and related practices. Estimating investor portfolio diversification using their holdings' return characteristics, we find a negative relationship between portfolio and corporate diversification that is robust to a quasi-natural experiment. Further, greater diversified ownership is associated with firms' distinctiveness, like undertaking fewer diversifying acquisitions and conducting non-core asset sales. These firms also have greater idiosyncratic risk and lower product market similarity to peers. Diversified blockholder counts, incentive compensation, quasi-indexer ownership, less volatile and non-crisis periods amplify our results. These findings illustrate how ownership structure can reshape the corporate landscape.

A global investment opportunity in non-listed infrastructure for institutional investors

PurposeInfrastructure investment is one of the few high-calibre real alternative assets with a strong prominence in the portfolios of institutional investors, especially those with a liability-driven investment strategy. This has seen increased institutional investor interest in infrastructure for reasons such as diversification benefits and inflation hedging abilities, resulting in the substantial growth in non-listed and listed investment products offering access to the infrastructure asset class, and complementing the existing route via direct investment. This paper aims to assess the investment attributes of non-listed infrastructure over Q3:2008–Q2:2019, compared with other global listed assets of infrastructure, property, stocks and bonds.Design/methodology/approachQuarterly total returns were derived from the valuation-based MSCI global non-listed quarterly infrastructure asset index over Q2:2008–Q:2019, which were then filtered to decrease the valuation smoothing effects. A similar set of returns data was also collected for the other global asset classes. The average annual return, annual risk, risk-adjusted performance and portfolio diversification benefits for non-listed infrastructure and other asset investment classes were then computed and compared. Lastly, a constrained optimal asset allocation analysis was performed to validate the performance enhancement role of global non-listed infrastructure in a mixed-asset investment framework.FindingsGlobal non-listed infrastructure delivered the strongest average annual total return performance, outperforming the other asset classes and provided investors with total returns that linked strongly with inflation. Global non-listed infrastructure also provided investors with one of the least volatile investment returns because of its ability to ensure predictable total returns delivery. This means that on the Sharpe ratio risk-adjusted return basis, non-listed infrastructure was also the strongest performing asset. This performance was also delivered with significant portfolio diversification benefits with all assets, resulting in non-listed infrastructure contributing to the mixed-asset portfolios across the entire portfolio risk spectrum.Practical implicationsAside from better risk-return trade-offs, institutional investors are getting more secular with their portfolios for alternative assets that are able to provide other investment benefits such as predictable long-term performance and inflation-linked returns. A further improvement in performance and diversification benefits could be achieved by enriching existing investment portfolios with real alternative assets, one of which is the infrastructure asset class. For institutional investors, having exposure to and being part of the development, delivery and management of infrastructure assets are important, as they are one of the few real assets having considerable significance in the context of society, economy and investment needs.Originality/valueThis is the first research paper that empirically investigates the investment attributes of the non-listed infrastructure at a global level. This research enables empirically validated, more informed and practical decision-making by institutional investors in the infrastructure asset class, especially via the non-listed pathway. The ultimate aim of this paper is to empirically validate the strategic role of non-listed infrastructure as an important alternative asset in the institutional real asset investment space, as well as in the overall portfolio context.

Monitoring the Monitor: Distracted Institutional Investors and Board Governance

Abstract Boards are crucial to shareholder wealth. Yet little is known about how shareholder oversight affects director incentives. Using exogenous shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors with negative votes. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

The Benefits of Issuing Green Bonds: Evidence From China Green Bonds Market

In 2019, China has become the largest issuance source in the global green bonds market. This paper studies the benefits of green bonds issuance to issuers and investors in China green bond market, including announcement effect, green premium, and the changes of firm financial performance and institutional ownership. First, green bonds issuance has a negative but insignificant announcement effect on the company’s stock return. Then we find that green premium is nearly zero demonstrating that investors are not willing to sacrifice profits for environmentally friendly projects. Thirdly, after green bonds issuance, financial performance of issuers does not have a significant improvement, but institutional ownership ratio has increased notably. In short, there is no significant difference between green bonds and conventional bonds in terms of issuance. Green bonds issuance may not have a direct pecuniary benefit to firms and investors but can be added into portfolios of institutional investors and improve their ESG score.

Dynamic Regime Strategy for Stress Testing and Optimizing Institutional Investor Portfolios

Our work aims to develop a stand-alone trading system to construct portfolios that show the benefits of value and momentum style integration and presents the effectiveness of alternative integration methods for long-only absolute return funds, which seeks absolute returns that are not highly correlated to traditional assets such as stocks and bonds. Our approach uses the CRoss Industry Standard Process for Data Mining (CRISP-DM) model to guide the necessary steps, processes, and workflows for executing our project.

The significance of residential REITs in Japan as an institutionalised property sector

PurposeResidential Real Estate Investment Trusts in Japan (residential J-REITs) have become an increasingly significant listed property sector recently. The purpose of this paper is to assess the effectiveness of residential J-REITs in a mixed-asset portfolio context in Japan by assessing the significance, risk-adjusted performance and portfolio diversification benefits of residential J-REITs over July 2006–August 2018. The ongoing property investment implications for residential J-REITs are also identified.Design/methodology/approachUsing monthly total returns, the risk-adjusted performance and portfolio diversification benefits for residential J-REITs over July 2006–August 2018 are assessed. An asset allocation diagram is employed to assess the role of residential J-REITs in a mixed-asset portfolio context in Japan.FindingsResidential J-REITs generally delivered superior risk-adjusted returns compared with the other sub-sector J-REITs, stocks and bonds in Japan over July 2006–August 2018, with desirable portfolio diversification benefits in the full mixed-asset portfolio context. Importantly,residential J-REITs are observed as strongly contributing to the mixed-asset portfolio context in Japan across the portfolio risk spectrum, particularly in a post-GFC context. This also reflects that residential J-REITs provide high portfolio returns and strong portfolio diversification benefits in a mixed-asset portfolio context in Japan.Practical implicationsResidential J-REITs are effective and liquid residential property investment exposure in Japan. The results highlight the strong risk-adjusted performance of residential J-REITs in Japan’s mixed-asset portfolio context. This suggests institutional investors, particularly Japan institutional investors, should consider including residential J-REITs in their mixed-asset portfolios, as residential J-REITs are seen as a compelling investment product co-existing alongside the other sub-sector REITs and major asset classes in institutional investor portfolios in the context of Japan. This also confirms the effectiveness of institutionalised residential J-REITs. Given the solid residential property market fundamentals in Japan, an increased level of the institutionalisation of residential J-REITs can be expected.Originality/valueThe study is the first study to assess the effectiveness of residential J-REITs, via assessing the significance, risk-adjusted performance and portfolio diversification benefits of residential J-REITs and their role in a mixed-asset portfolio context in Japan. This research enables more informed and practical property investment decision making regarding the value-added and strategic role of residential J-REITs as effective and liquid residential property investment exposure in Japan, as well as an increasingly institutionalised property sector going forward.

Sovereign Debt Restructurings: The Case of Venezuela—Issues and Challenges

In November 2017, the Venezuela government announced its intention to restructure its sovereign debt. To address the challenges and issues involved, we organized a conference at Drexel University on February 23, 2018, sponsored by the Global Interdependence Center and Drexel University’s LeBow College of Business. Internationally recognized experts, academics, and renowned practitioners representing a variety of institutional perspectives presented complex issues related to the anticipated restructuring and touched upon economic, geopolitical, legal, and market-driven conditions that will impact the success of the restructuring. Although the case of Venezuela’s restructuring is complicated due to political considerations and the current humanitarian crisis in the country, nevertheless it offers a multifaceted review of a sovereign debt restructuring as more countries are expected to restructure their debt in the near future, given the rising interest rate environment. The estimated $150 billion restructuring of Venezuela’s sovereign and Petróleos de Venezuela, S.A. (PDVSA)’s debt will have a major impact on investment portfolios of institutional investors in the years to come. This article serves as an introduction to the topics covered in the conference and as a synopsis of the contributions.

Will Tenure Voting Give Corporate Managers Lifetime Tenure?

Dual-class voting systems have been widely employed in recent initial public offerings by large tech companies, but have been roundly condemned by institutional investors and the S&P 500. As an alternative, commentators have proposed adoption of tenure voting systems, where investor voting rights increase with the length of time that they hold shares. In furtherance of this proposal, some Silicon Valley investors have requested that the SEC permit the creation of a new stock exchange where all of the companies will be required to use tenure voting systems. Is tenure voting a better choice than dual-class stock for both corporate management and shareholders? In this paper, we review the arguments for and against tenure voting that have been made in the literature. In order to shed light on these claims veracity, we generate the first data base that documents institutional investor portfolio turnover rates for stock. We use this data to inform our mathematical voting model of tenure voting to show how its adoption would affect control rights within the corporation. We make two main findings that shed light on this question. First, we show that when corporate management holds a large block of company stock prior to the implementation of tenure voting, and retains at least 20-30% of the total number of company shares on a long term basis, then tenure voting will insure that corporate managers maintain control of the company even in the face of an attempted change of control transaction by a highly motivated dissident shareholder. Our second important finding is that if corporate management chooses to sell off its large initial block of the company’s stock over time, so that inside ownership levels drop eventually down to a low percentage level with the majority of ownership held by institutional shareholders with different investment horizons, then the use of tenure voting systems does little to protect management control in a proxy contest for corporate control. We conclude that tenure voting does indeed represent an intermediate form of voting control from a managers’ perspective: it does not guarantee management control, as dual-class share structures do, but does give control to management who maintain large equity stakes in the firm. Institutional investors are likely to see it as an improvement over dual-class stock structures in terms of giving them corporate governance rights, although less advantageous to these shareholders’ rights than a one share, one vote voting system.

Some Like it Hedged

Foreign currency exposure is a by-product of international investing. When obtaining global asset exposure, investors also obtain the embedded foreign currency exposure. The impact of this foreign currency exposure on the return and the volatility of the institutional investor’s portfolio can be quite meaningful. For example, according to a Reuters’ article, the rise in the US dollar wiped out about $1 trillion in US pension fund assets (i.e., in the dollar value of the funds’ non-dollar-denominated assets) between mid-2014 and March 2015 (Chavez-Dreyfuss 2015). How to address this exposure has been a subject of much debate over the years. The seminal paper by Black (1989) argued for a “universal” hedge ratio for all investors. Perold and Schulman (1988) argued that US investors should completely hedge foreign currency exposure; another school of thought is that foreign currency exposure provides diversification benefits and should be left unhedged. Recently, Chen, Kritzman, and Turkington (2015) evaluated the impact of various currency-hedging strategies on a typical institutional investor portfolio. As expected, more-flexible strategies provide greater risk reduction, but there is no single best strategy ex ante, leaving investors to consider different risk–return trade-offs. Although no single best-practice solution exists for addressing foreign currency exposures, institutional investors have three main choices: 1. Do nothing (i.e., maintain unhedged foreign currency exposure). 2. Hedge passively (i.e., maintain a constant hedge ratio). 3. Hedge actively (i.e., vary the hedge ratio). The best solution will differ from institution to institution, but it comes down to two fundamental factors. First, the optimal solution depends on the importance of risk versus return and the institution’s tolerance for negative cash flow. Second, investors must decide whether they believe that currency managers are able to achieve a positive information ratio over the long term after fees and, importantly, whether they will be able to identify these currency managers. Before I address the available choices, I present the estimated impact of foreign currency exposure on institutional portfolios. In the following sections, I consider four different base currencies: the US dollar, Canadian dollar, euro, and Japanese yen.

Do Connections with Buy-Side Analysts Inform Sell-Side Analyst Research?

We hypothesize that connections with buy-side analysts provide a sell-side analyst with private information generated by the buy-side that enhances the quality of sell-side research. We proxy for these connections with the number of stocks at the intersection of stocks held in the portfolios of institutional investors and followed by the sell-side analyst. The larger this intersection, the more opportunities the sell-side analyst has to interact with institutional investors. We proxy for the research quality of the sell-side analyst with her earnings forecast accuracy. We find that such connections enhance the accuracy of earnings forecasts, but up to a point of diminishing returns. Additional tests rule out reverse causality and omitted variables as explanations for the association, and strengthen the inference that connections between sell- and buy-side analysts increase the flow of information and improve the quality of sell-side research output.

Monitoring the Monitor: Distracted Institutional Investors and Board Governance

Boards are crucial to shareholder wealth. Yet, little is known about how shareholder oversight affects director incentives. Using exogenous industry shocks to institutional investor portfolios, we find that institutional investor distraction weakens board oversight. Distracted institutions are less likely to discipline ineffective directors. Consequently, independent directors face weaker monitoring incentives and exhibit poor board performance; ineffective independent directors are also more frequently appointed. Moreover, we find that the adverse effects of investor distraction on various corporate governance outcomes are stronger among firms with problematic directors. Our findings suggest that institutional investor monitoring creates important director incentives to monitor.

A Class of its Own: The Role of Sustainable Real Estate in a Multi-Asset Portfolio

In this paper, we analyze the effect of socially responsible investments within a multi-asset portfolio optimization model. We also attempt to bridge the gap in the real estate literature between sustainability principles and investment analysis. To this aim, listed real estate companies with an active sustainability agenda, identified through the MSCI ESG database, represent the sustainable real estate asset class. Applying a downside risk approach by using a conditional value at risk (CVaR) optimization technique, we establish empirically whether diversification benefits can be achieved by investing in companies with a proven track record in sustainability. Our results highlight the potential contribution of listed real estate companies with high sustainability ratings to an institutional investor's portfolio taking into account differences in investment style and risk aversion.

UK pension sustainability and fund manager governance: agent duties to the principal

Sustainable investing includes the application of non-financial (Environmental, Social and Governance (ESG)) criteria to asset selection in institutional investor portfolios [Capelle-Blancard, G., and S. Monjon. 2011. “Trends in the Literature on Socially Responsible Investment: Looking for the Keys Under the Lamppost.” Business Ethics: A European Review 21(3): 239–250]. The article explores the implications for applying ESG screening to the institutional investors making the asset selections. Institutional investors are a heterogeneous group of investors, with fund managers specifically being some of the largest listed organisations globally [Ingley, C. B., and N. T. van der Walt. 2004. “Corporate Governance, Institutional Investors and Conflicts of Interest.” Corporate Governance 12(4): 534–553]. Whether their own corporate management duties to fiduciary governance (the G in ESG) benefiting their shareholders has any material impact on the financial returns outcomes of the pension asset management contract, and specifically whether there is a fiduciary conflict favouring of the exclusive best interest of fund management shareholders is the question addressed by the paper.