Investment Management Industry Research Articles

‘In this world, nothing is certain except death and taxes’ — but what about regulatory change for the investment management industry?

‘In this world, nothing is certain except death and taxes’ — but what about regulatory change for the investment management industry?

Research and Analysis of College Students' Investment and Financing under the Background of Internet

In recent years, the prosperity of Internet finance has led to the rapid development of investment and financial management industry. People's financial management is not only traditional bank savings, but also gradually transition to Internet financial management. With the increase of national income, the disposable funds obtained by college students will increase. As a generation with high viscosity in the Internet era, college students will be an important force in the future Internet financial management market. College students with strong learning ability and willingness to accept new things of higher advantage, can use the network platform for learning, consumption, financial management, and some students interested in finance and investment also dabbled in financial field. However, the lack of experience of college students and the lack of necessary risk prevention awareness of financial investment leads to bad online loans and financial fraud. Therefore, to finance investment into the students' future career planning curriculum has certain necessity. This paper mainly analyzes the situation of college students' Internet financial management, pointing out the characteristics of college students' Internet financial management, problems and future trends of college students' financial management. The purpose is to cultivate college students' financial habits, financial awareness and ability, establish a correct outlook on life and wealth, guide them, avoid falling into the trap of financial fraud, and lay a solid foundation for future life financial planning.

Economic demand for auditing services in the “registered” investment management industry

AbstractWe hypothesize that the demand for auditing in the registered investment management industry arises from the auditor's ability to act as a solvent indemnifier when outside parties incur losses because of financial misrepresentations. Consistent with this insurance demand, we find that, relative to financial companies, registered investment companies are more likely to retain Big 4 auditors. Restricting the sample to the registered investment management industry, we construct three direct tests of the insurance demand hypothesis. We find that (a) the market share of a Big 4 firm is positively associated with the firm's wealth, (b) changes in audit fees are positively associated with changes in the audit firms’ wealth, and (c) net fund flows increase when clients switch from non‐Big 4 to Big 4 auditors. Our results highlight an unusually high demand for Big 4 auditors in the registered investment industry, which we attribute to the insurance demand for auditing services.

The Changing Economics of Knowledge Production

Abstract Big data technologies change the way in which data and labor combine to create knowledge. Is this a modest innovation or a data revolution? Using hiring and wage data, we estimate firms’ data stocks and their knowledge production functions. Quantifying changes in production functions informs us about the likely long-run changes in output, in factor shares, and in the distribution of income, due to big data technologies. For the investment management industry, our structural estimates predict a 5% decline in the labor share of income; that change is comparable to similar estimates for the industrial revolution. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Legitimacy and the extraordinary growth of ESG measures and metrics in the global investment management industry

ESG metrics are increasingly important in the global investment management industry. Why this came to pass given the limited appetite for responsible investing in the industry is the subject of this paper. Although the business case for ESG provides an explanation for its increasing uptake whereby market actors are increasingly convinced of the merits of ESG as a profit centre, this explanation is insufficient. By contrast, the adoption the ESG programme offers a means of rewriting the terms of risk management and value creation that while grounded in the business case also serve to address challenges to the legitimacy of the global asset management industry. These developments are illustrated in a case study of the establishment and growth of TruCost and its purchase by S&P Global in 2016.

Practical Applications of Thriving Amid the Ravages of Creative Destruction in the Investment Management Industry

In <b><i>Thriving Amid the Ravages of Creative Destruction in the Investment Management Industry</i></b>, from the June 2022 30th anniversary special issue of <b><i>The Journal of Investing</i></b>, author <b>Donald Peters</b> (of <b>T. Rowe Price</b>) shares insights from his 35-year career in the field. He emphasizes the competitive value of embracing non-mainstream approaches, such as working with a longer time horizon while most investment managers are focused on the short term. Other examples include reading academic investment literature (to keep up with the latest thinking), reading proxy statements (to learn about CEOs’ financial stake in their companies), focusing on <i>after-tax</i> returns, and dissuading retail investors from engaging in speculation. Peters asserts that investment management is a highly rewarding career that is all about adding value and helping clients reach their financial goals. Initial success comes to those who are intelligent, adapt to changing markets, and work well with a team. They must have intellectual curiosity, a passion for investing, and outside friends and interests that give them different perspectives. They must think like detectives when analyzing stocks, while being savvy enough to sort out facts from sometimes biased company communications. Managers also can help their communities and themselves by joining the boards of nonprofits, where they gain valuable knowledge about institutional investing and consulting.

Hard Law and Soft Law Regulations of Artificial Intelligence in Investment Management

AbstractArtificial Intelligence (‘AI’) technologies present great opportunities for the investment management industry (as well as broader financial services). However, there are presently no regulations specifically aiming at AI in investment management. Does this mean that AI is currently unregulated? If not, which hard and soft law rules apply?Investments are a heavily regulated industry (MIFID II, UCITS IV and V, SM&amp;CR, GDPR etc). Most regulations are intentionally technology-neutral. These regulations are legally binding (hard law). Recent years saw the emergence of regulatory and industry publications (soft laws) focusing specifically on AI. In this Article we analyse both hard law and soft law instruments.The contributions of this work are: first, a review of key regulations applicable to AI in investment management (and oftentimes by extension to banking as well) from multiple jurisdictions; second, a framework and an analysis of key regulatory themes for AI.

Practical Applications of Jack Bogle and Smart Beta: Disruption in the Investment Management Industry

In <b><i>Jack Bogle and Smart Beta: Disruption in the Investment Management Industry</i></b>, from the Spring 2022 issue of <b><i>The Journal of Beta Investment Strategies</i></b>, authors <b>Rob Arnott</b> and <b>Katrina Sherrerd</b> of <b>Research Affiliates</b> credit Bogle’s decision to separate inexpensive beta from the more-expensive quest for alpha with being perhaps the most profound disruption of the investment industry in its history. The authors provide an overview of their own firm’s early impact on the development of smart beta investing, inspired in part by Bogle’s innovations, and a look at the subsequent evolution of smart beta. Their overview of the current beta investing landscape counsels investors on the benefits and dangers in the smart beta arena. They conclude by providing four principles for smart beta investing.

Thriving Amid the Ravages of Creative Destruction in the Investment Management Industry

Investment management is a wonderful and rewarding career. A portfolio manager works to help clients fulfill their financial objectives. However, the business becomes tougher every single year and is a meritocracy. Staying in the profession requires continuous improvement and membership on a great team.

Jack Bogle and Smart Beta: Disruption in the Investment Management Industry

Jack Bogle, an ardent advocate of low-cost investing, transformed the investment industry in the mid-1970s with the first Vanguard index mutual fund that offered retail investors the opportunity to own the equity market (or at least the 500 companies in the S&amp;P 500 Index) via a transparent, low-governance, high-capacity investment vehicle. Jack’s consistent message over the decades of the futility of trying to beat the market—and therefore the wisdom of cap-weighting—popularized the concept of separating alpha from beta. Without this bifurcation, the smart beta revolution might never have happened. In this article, Rob Arnott and Katy Sherrerd trace the evolution of beta investing from the launch of the Fundamental Index concept that motivated the term <i>smart beta</i> to the much broader beta investing landscape of today. They conclude with four actionable principles for investing in smart beta strategies.

Jack Bogle and Smart Beta: Disruption in the Investment Management Industry

Jack Bogle, an ardent advocate of low-cost investing, transformed the investment industry in the mid-1970s with the first Vanguard index mutual fund that offered retail investors the opportunity to own the equity market (or at least the 500 companies in the S&amp;P 500 Index) via a transparent, low-governance, high-capacity investment vehicle. Jack’s consistent message over the decades of the futility of trying to beat the market—and therefore the wisdom of cap-weighting—popularized the concept of separating alpha from beta. Without this bifurcation, the smart beta revolution might never have happened. In this article, Rob Arnott and Katy Sherrerd trace the evolution of beta investing from the launch of the Fundamental Index concept that motivated the term <i>smart beta</i> to the much broader beta investing landscape of today. They conclude with four actionable principles for investing in smart beta strategies.

Active Share and the Predictability of the Performance of Separate Accounts

Separate accounts are a large and unique, but understudied, part of the investment management industry. Within our sample, on net, the average separate account underperforms, but for those with high active share, we find positive performance persistence. Among high active share separate accounts, a portfolio of those with strong past performance has a subsequent net alpha of 1.38% per year (t = 2.11). That result strengthens when return dispersion is high and among separate accounts with a small cap style, a fundamental investment approach, or lower cash holdings. These results provide out-of-sample support for the predictive utility of active share.

Charting the Indefatigable Rise of Public Regulation of the Investment Management Industry

Charting the Indefatigable Rise of Public Regulation of the Investment Management Industry

Do ethical perceptions help explain under-representation of women in investment management? A comparison of students from the U.S. and China

Gender participation rates are very low for women in finance, particularly in investment management. Traditional explanations for gender disparity fail to explain consistently poor results in finance, but improving participation for similarly competitive fields such as law, medicine or STEM. However, evidence also suggests a negative perception of ethics in the finance profession. We propose that women may be particularly sensitive to these ethical perceptions, leading them to avoid finance careers. We survey college students about investment management ethics across the U.S. and China. Our results suggest women in the U.S. (China) tend to have pessimistic (optimistic) ethical views of investment management, compared to their male counterparts. Also, Chinese women have significantly more positive views of ethics in the investment management industry than U.S. women, while Chinese and U.S. men portray similar opinions. These findings may help explain why gender participation in investment management is highly-skewed toward men in the U.S., but more balanced in China. These results highlight that reinforcing ethical behaviors could help enhance broader participation in investment management careers in the U.S.

The Active World of Passive Investing

Abstract We investigate the new reality of exchange-traded funds (ETFs). We show that most ETFs are active investments in form (designed to generate alpha) or function (serve as building blocks of active portfolios). We define a new activeness index to capture these dimensions, finding that the cross-section of ETFs is now increasingly characterized by highly active investment vehicles. Active-in-form ETFs have positive flow-performance sensitivity, charge the highest fees among ETFs, and have high within-portfolio turnover. Active-in-function ETFs have more concentrated holdings, less within-portfolio turnover, but higher turnover in the secondary market. We show how more active ETFs are gaining market share over less active ETFs, leading to competitive fee pressure both within the ETF space and across the investment management industry. We suggest that the growing activeness of ETFs may assuage concerns about ETFs harming price discovery.

Financial Operating Systems

One of the most consequential yet unexamined developments in finance is the recent evolution of large financial technology platforms. In the first analysis of its kind, we scrutinize the world’s $89 trillion investment and asset management industry to explore the function of these systems, to consider their possible risks, and to develop a taxonomy for their regulation. This analysis is essential because these systems now play a critical role in asset management, rendering nugatory several layers of existing regulation. While the COVID-19 pandemic has caused havoc with economic activity, it has accelerated this process of digitization and concentration of financial control. The leading example of such a platform is BlackRock’s Aladdin, a system used to manage the risks relating to ten percent of the world’s investment assets and which institutional investors – as well as the U.S. government – admit they cannot operate without. Even greater concentrations of financial power are possible when Big Technology firms and finance unite. Ant Group, a spinoff of Alibaba, controls a financial ecosystem for over 1.2 billion clients – twenty-one percent of the world’s adults – covering all financial services, including payments, insurance, asset management, and deposits. Large U.S. financial and tech firms, including Facebook, Apple, and Google, are working hard to emulate Ant’s scale and scope, driving concentration into a small number of dominant digital finance platforms. Although Financial Technology is typically associated with small innovative firms, we argue that these giant digital finance platforms are already having a far greater impact on society. We identify the economic reasons for the dramatic ascendancy of these financial leviathans and propose a legal framework for mitigating their threats to national security, financial stability, consumer protection, antitrust and cybersecurity.

The Changing Economics of Knowledge Production

Big data technologies change the way in which data and human labor combine to create knowledge. Is this a modest technological advance or a data revolution? Using hiring and wage data, we show how to estimate firms' data stocks and the shape of their knowledge production functions. Knowing how much production functions have changed informs us about the likely long-run changes in output, in factor shares, and in the distribution of income, due to the new, big data technologies. Using data from the investment management industry, our structural estimates predict that the labor share of income in knowledge work may fall by 5%. The change associated with big data technologies is similar in magnitude to estimates of the change brought on by the industrial revolution.

Active Share and the Predictability of Portfolio Performance: Out-of-Sample Evidence from Separate Accounts

Separate accounts are a large and unique, but understudied, part of the investment management industry. Within our sample, on net, the average separate account underperforms, but for those with high active share, we find positive performance persistence. Among high active share separate accounts, a portfolio of those with strong past performance has a subsequent net alpha of 1.38% per year (t-stat = 2.11). That result strengthens when return dispersion is high and among separate accounts with a small cap style, a fundamental investment approach, or lower cash holdings. These results provide out of sample support for the predictive utility of active share.

Fraud and Abuse in the PPP? Evidence from Investment Advisory Firms

This study investigates the nature and magnitude of abuse in the Paycheck Protection Program (PPP or the Program) using PPP loans made to 2,999 investment advisory firms registered with the U.S. Securities and Exchange Commission (SEC). We show an existing model of investment advisor fraud predicts unusually large PPP loans at a rate similar to actual cases of fraud. Investment advisors abusing the Program were significantly more likely to disclose a history of past fraud and other legal and/or regulatory misconduct. Using a conservative approach, we estimate that more than 6% of the $590 million in PPP funds received by companies in the investment management industry consisted of statutory overallocations to firms abusing the Program. We test a variety of hypotheses to shed further light on the nature of PPP abuse.

Investment management: Competing in a data-driven world

The investment management industry is unquestionably in the midst of change. Competitive pressures are arising in terms of revenues, operating costs, winning new clients and retaining existing clients. At the same time, companies must adapt to the ever-changing regulatory environment and comply with new streams of regulation. Companies endeavour to navigate the complex market environment, consider the profitability hurdles, and evolving investor demands. This paper explores the challenges encountered by investment managers and outlines the opportunities for leveraging data analytics to enhance productivity and deliver superior client outcomes.