Investment Time Horizon Research Articles

Cognitive Barriers to the Engagement of Wealthy Private Investors in Sustainable Investing

The notion that sustainable investing (SI) has become a mainstream investment style is challenged by the observation that private investors appear substantially underrepresented in SI compared to institutional investors. This study empirically explores SI-barriers for private investors. We provide insights from interviews with High Net Worth Individuals (HNWIs), an economically highly significant yet secretive and thus little researched segment of private investors. Our results indicate substantial, individually different interest in SI amongst HNWIs, and propose three specific SI-barriers. The first barrier pertains to a perception-based information asymmetry. Investment advisors appear to misinterpret clients’ individually specific interest in SI. Barrier two relates to HNWIs’ perception of SI as limited to themes that are above-average volatile. This perception limits the engagement in SI in case of a short investment time horizon. Barrier three likewise relates the perception of SI as volatile to the effect of financial losses. We reflect on the observed significance of investors’ perceived volatility of SI, investment time horizon and financial losses by relating them to Prospect Theory. In sum, investors’ cognition of SI appears to be an important engagement reason that goes beyond the usual business-case-arguments and that deserves more attention in future research.

Portfolio Optimization: Indifference Curve Approach

The study examines the monthly stock prices of 45 SENSEX companies for the period ranging from February 2002 to January 2012. Also the study includes the Indian G-SEC long term bonds with maturities ranging from 15 to 25 years. The set of all efficient portfolios is called the efficient frontier. All risk-averse investors who act to maximize expected utility have an optimal portfolio on this frontier. Based on the risk-aversion factor and the investment time horizon of each individual investor, an attempt is being made to select the optimal portfolio for that particular investor. Given a utility function for an individual investor, the portfolio optimization problem is to find the indifference curve which is tangent to the efficient frontier. The optimal portfolio for the investor lies at the point of tangency between the efficient frontier and the indifference curve. The findings of the study bring out the importance of the investor‟s time horizon and the risk-aversion factor in portfolio optimisation.

Minding the Gap

Management researchers have long been concerned with the antecedents and consequences of managerial compensation. More recently, scholarly and popular attention has turned to the gap in pay between workers at the highest and lowest levels of the organization, or “pay dispersion.” This study investigates the performance implications of pay dispersion on a longitudinal (10-year) sample of publicly traded firms from multiple industries. We combine explanations based on tournament theory and equity theory to develop a model wherein pay dispersion has opposing effects on a firm’s short-term performance and their trend in performance over time. We also show that ownership is a key antecedent of pay dispersion. Specifically, transient institutional investors (who have short time horizons and equity stakes in a wide variety of firms) positively influence pay dispersion whereas dedicated institutional investors (who have longer investment time horizons and equity stakes in fewer firms) negatively influence pay dispersion. We discuss the wide-ranging implications of these findings for scholars, managers, and policy makers alike.

Comparing Local Risks by Acceptance and Rejection

It is said that risky asset h acceptance dominates risky asset k if any decision maker who rejects the investment in h rejects also the investment in k. As Hart (2011) shows, acceptance dominance is an incomplete order on an ordinary set of gambles. We extend the definition of acceptance dominance order to risky assets whose values follow random processes. We call the risk that arises from investing in such assets, with a short investment time horizon, local risk. We show that for small investment time horizons, the acceptance dominance order is a complete order that can be represented by an index of local risk. Moreover, we show that the measures of riskiness proposed by Aumann & Serrano (2008), Foster & Hart (2009), and Schreiber (2011) all coincide with our index. We use the differential calculus as an analytical tool to present our results.

COMPARING LOCAL RISKS BY ACCEPTANCE AND REJECTION

It is said that risky asset h acceptance dominates risky asset k if any decision maker who rejects the investment in h also rejects the investment in k. While in general acceptance dominance is a partial order, we show that it becomes a complete order if only infinitely short investment time horizons are considered. Two indices that induce different variants of this order are proposed, absolute acceptance dominance and relative acceptance dominance, and their properties are studied. We then show that many indices of riskiness that are compatible with the acceptance dominance order coincide with our indices in the continuous-time setup.

Asset allocation in private wealth management: Theory versus practice

This study analyzes the responses to a representative survey of wealth advisors on private wealth management practices, and compares the advisors’ views with academic research in household finance. This study demonstrates that many wealth managers do not apply novel insights proposed by financial economists when advising their clients. Many practitioners focus on managing only the market risk exposure of their clients’ portfolios. Although financial research has stressed the importance of incorporating human capital, planned future expenditures and the investment time horizon into the investor’s asset allocation, these aspects are neglected by most practitioners.

Finance Capital Launches an Assault on Chinese Real Estate

Over the past two decades, global market finance has taken root in China to seek property investment. This article examines the spatialities and anchorage methods of finance capital within Chinese national territory. It highlights the spatial and sectoral differences in the composition of property portfolios as a function of the return/risk coupling. These differences are exacerbated by a split in the geographical origin of the funds, which determines differentiated conditions of access to land and management of the investment time horizon of the assets portfolios. The penetration of finance capital into urban space tends to increase the fragmentation and functional specialisation of districts, a phenomenon fostered by entrepreneurial urban policies. As a result, urban projects are becoming standardised in terms of both design and program. They are increasingly governed by external references that favour the expansion of multinationals and transform lifestyles and consumer habits.

Optimal investment and consumption strategies with state-dependent utility functions and uncertain time-horizon

This paper considers the multi-period optimal strategies for an investment-only problem and an investment–consumption problem. The financial market is regime-switching and consists of one risk-free asset and multiple risky assets. The state process of the financial market is modeled by a finite-state Markov chain. Asset returns and utility functions are affected by the states of the financial market. The investment time-horizon is uncertain and exogenous. By adopting the dynamic programming approach, explicit expressions for optimal value functions and optimal investment and consumption strategies are derived. Moreover, some discussions and numerical examples are provided to illustrate our results, which extend some results in the existing literature to more general situations and show some interesting phenomena.

Special issue on “Management, governance and regulation in the changing investor landscape: the rise of alternative investments”

1 IntroductionIn recent years, there has been a rapid growth in a large range of investmentmanagers that represent alternatives to traditional equity holding in listedcorporations by individuals and institutions such as pension funds and insurance.These alternative investors include private equity, hedge funds, sovereign wealthfunds, infrastructure funds, etc. These trends have important implications for themanagement and governance of firms that have to date received varied attention. Inparticular, the changing investor landscape raises critical research questionsregarding the structures and processes of shareholder engagement with portfoliocompanies. However, the extent to which alternative investors represent new formsof engagement and governance that cover all stages of firms’ life-cycle is as yetunclear (Wright et al. 2013). The returns from some forms of alternative investors,notably private equity firms, have attracted other forms of entrants to the marketsuch as hedge funds which may have different skills, different objectives anddifferent investment time horizons. Similarly, the entry of sovereign wealth fundsraises further issues and concerns about their strategic objectives and theimplications for their portfolio companies.The increase in the range and diversity of these investment institutions also raisesdirect questions about the extent to which the regulatory authorities are capable ofdealing with the challenges that these new investment vehicles pose in terms of theirinvolvement in corporate governance. Developments in the presence and roles ofalternative investors have generated considerable policy debate and have led to

Asset Allocation in Private Wealth Management: Theory Versus Practice

This study analyzes the responses to a representative survey of wealth advisors on private wealth management practices, and compares the advisors’ views to academic research in household finance. This study demonstrates that many wealth managers do not apply novel insights proposed by financial economists when advising their clients. Many practitioners focus on managing only the market risk exposure of their clients’ portfolios. Although financial research has stressed the importance of incorporating human capital, planned future expenditures and the investment time horizon into the investor’s asset allocation, these aspects are neglected by most practitioners.

Increased Unengaged Monitoring and Shifts in Investment Time Horizons of U.S. High-tech Firms

The strategic governance literature argues that stringent monitoring of firms can reduce information asymmetry, thereby increasing executives’ long-term orientation. However, monitoring that involves limited interaction between monitors and executives, which we refer to as unengaged monitoring, reduces information asymmetry about short-term activities without reducing information asymmetry about uncertain long- term activities. Unengaged monitors’ emphasis on current activities creates earnings pressure that increases employment risk and shifts managers’ preferences away from uncertain long-term investments. This paper assesses how the 2002 Sarbanes-Oxley Act affected U.S. firms operating in high- technology sectors, showing that greater unengaged monitoring often reduced R&D and increased short-term investments. The shift of time horizons was strongest for firms with higher managerial discretion and/or lower technological competition, where monitors face greatest ambiguity about long-term investments.

Reconciling transparency and long-term investing within sovereign funds

One of the potential consequences of the international community's focus on transparency and commercial orientation, when it comes to sovereign wealth funds, has been to shorten the latter's investment time horizons. As a result, these theoretically long-term investors are pressured into behaving like many short-term investors in the marketplace today, pushed by structural conditions that demand short-term performance in order to secure legitimacy. In evaluating the tension between transparency and long-term investing, we offer a conceptual framework for thinking through different types of transparency pertaining to the investment process as a means of discussing and communicating acceptable and non-acceptable asymmetric information in relation to financial performance.

Optimal diversity in investments with recombinant innovation

The notion of dynamic, endogenous diversity and its role in theories of investment and technological innovation is addressed. We develop a formal model of an innovation arising from the combination of two existing modules, with the objective to optimize the net benefits of diversity. The model takes into account increasing returns to scale and the effect of diversification of investments on the probability of emergence of a third option. We obtain analytical solutions describing the dynamic behaviour of the values of the options. Next, diversity is optimized by trading off the benefits of recombinant innovation and returns to scale. We derive conditions for optimal diversity under different regimes of returns to scale. Threshold values of returns to scale and the recombination probability define regions where either specialization or diversity is the best choice. When the investment time horizon is beyond a threshold value, a diversified investment strategy is the best choice. This threshold will be larger for higher returns to scale. This problem is relevant to allocation of scarce funds by governments, research councils, firms and investors.

Organizational Culture in an Academic Health Center

Implementing cultural change and aligning organizational cultures could enhance innovation, quality, safety, and job satisfaction. The authors conducted this mixed-methods study to assess academic physician-scientists' perceptions of the current and preferred future organizational culture at a university medical school and its partner health system. In October 2010, the authors surveyed academic physicians and scientists jointly employed by the University of Oxford and its local, major partner health system. The survey included the U.S. Veterans Affairs Administration's 14-item Competing Values Framework instrument and two extra items prompting respondents to identify their substantive employer and to provide any additional open-ended comments. Of 436 academic physicians and scientists, 170 (39%) responded. Of these, 69 (41%) provided open-ended comments. Dominant hierarchical culture, moderate rational and team cultures, and underdeveloped entrepreneurial culture characterized the health system culture profile. The university profile was more balanced, with strong rational and entrepreneurial cultures, and moderate-to-strong hierarchical and team cultures. The preferred future culture (within five years) would emphasize team and entrepreneurial cultures and-to a lesser degree-rational culture, and would deemphasize hierarchical culture. Whereas the university and the health system currently have distinct organizational cultures, academic physicians and scientists would prefer the same type of culture across the two organizations so that both could more successfully pursue the shared mission of academic medicine. Further research should explore strengthening the validity and reliability of the organizational culture instrument for academic medicine and building an evidence base of effective culture change strategies and interventions.

Reconciling Transparency and Long-Term Investing within Sovereign Funds

One of the potential consequences of the international community’s focus on transparency and commercial orientation when it comes to sovereign wealth funds has been to shorten the latter’s investment time horizons. As a result, these theoretically long-term investors are pressured into behaving like the many short-term investors in the marketplace today, pushed by structural conditions that demand short-term performance in order to secure legitimacy. In evaluating the tension between transparency and long-term investing, we offer a conceptual framework for thinking through different types of transparency pertaining to the investment process as a means of discussing and communicating acceptable and non-acceptable asymmetric information in relation to financial performance.

The Fallacy of Price/Earnings to Growth Ratios

Price/earnings to growth (PEG) ratios are based on mathematics, but shockingly, the PEG ratio is only accurate under a very specific set of circumstances that are rarely ever met in the investment market place. Does the PEG ratio have any basis in reality and can you trust it? In our discussion, we offer case studies of Facebook and Extended Stay America and conclude that the PEG ratio is dangerous to use for businesses trading at high P/Es. Earnings growth rates simply cannot keep up with the high initial purchasing cost. In the Facebook example, if all other variables are held fixed, including the 10-year earnings growth rate, but you pay only 35 earnings, then the growth rate needed to break even is “only” 150.8%. For businesses with PEG ratios less than 1.0, caution rises in proportion to the magnitude of the P/E. The higher the P/E the more dangerous is the PEG ratio; and the danger rises exponentially, not geometrically. The PEG ratio breaks down in that it doesn’t account for the time value of money, makes no assumption for how to reinvest earnings, and doesn’t factor in the investment time horizon. What is the special case where the PEG ratio holds? The ratio holds when your desired rate of return and your earnings reinvestment rate are equivalent to the earnings yield of the business.

How do the capital markets undermine sustainable development? What can be done to correct this?

This article sets out how the capital markets relate to sustainable development issues and makes some modest proposals for how to improve our capital markets. It argues that capital markets' influence over corporate sustainable development originates via two principal routes: (i) financial influence—the buying and selling of equity shares and debt on the capital market influences the cost of capital for listed companies; and, (ii) investor advocacy influence—shareholders are the principals of the business and can exercise their rights of share ownership over their agents, the company directors, by sending explicit signals regarding the management of the company. Capital markets generally do not need to understand nor reward sustainable behaviour. This is either because the markets are inefficient and do not reward good behaviour, or because market failures means that investors do not need to worry about the very long term costs as they are outside of their investment time horizons. In order to change this, we should focus on the incentives of all key players within the capital supply chain such that they are all sanctioned and incentivized partly on their sustainability performance. The market also needs much better market information on the sustainability performance of companies. Better training of market participants on the materiality of sustainability issues as well as how they can be factored into valuation analysis would also help. However, before capital markets can be genuinely sustainable we need capital market policy makers to have greater regard for future generations when setting policy. This will require greater government intervention, particularly around the regulation of investor delivery of responsible ownership.

수익률 기반 스타일 분석을 이용한 국내 주식형 펀드의 스타일 지속성 검증

Based on the importance of asset allocation in the return of an investment portfolio, this article attempts to verify the appropriateness of mutual funds as means of investment to obtain optimal asset allocation. The return-based style analysis is applied to determine a mutual fund's allocation(or a style) among a set of specified asset classes. Assuming a particular investor who defines a range allowed a fund's style to differ from its original one, it is examined whether or not the fund style is continued over an investment time horizon. After verifying the fact that the original style of the investment fails to remain unchanged from the empirical analysis limited to domestic equity mutual funds, we further investigated the reasons for the style drift. Despite several limitations of the analysis, it yields the conclusion that domestic equity mutual funds do not seem to be an appropriate investment tool to achieve a target asset allocation.

The impact of the global economic crisis on sovereign wealth funds

This paper analyses the effects of the recent global economic crisis upon sovereign wealth funds (SWFs). Since mid‐2007, SWFs have experienced significant portfolio losses, a decline in fund inflows, and enhanced scrutiny from their own governments. SWFs have been utilised for sovereign stabilisation programs and have helped finance troubled Western banks. SWFs and the IMF have also created a set of best practices known as the Santiago Principles. From these developments, many SWFs have moved to relatively shorter investment time horizons and more liquid holdings, revamped their transparency and management, experienced a temporary improvement in their images, begun to hold controlling stakes in major Western corporations, and have improved their coordination with institutional investors and other SWFs. Going forward, these changes, alongside the relatively strong post‐crisis asset position held by SWFs in comparison to other asset vehicles, make SWFs well‐positioned to play an even more prominent role in global finance.

Digital Portfolio Theory: Portfolio Size, Versus Alpha, Beta, and Horizon Risk

Digital Portfolio Theory (DPT) permits investors to control their risk exposure with respect to multiple investment time horizons. DPT is a theoretical enhancement for estimating efficient portfolios that drops the normal distribution and zero autocorrelation assumptions of Modern Portfolio Theory (MPT) and allows effects of unconditional mean reversion risk at multiple horizons. The time horizon composition of single period risk creates hedging demands based on investor holding period and expectations without regard to changes in expected returns, changes in risk, or changes in state variables. DPT is a mean-variance-autocovariance portfolio optimization paradigm that allows investors to strategically control the risk that patterns occur but includes no information about what patterns other than their length. DPT incorporate more of the structure of the risk process contained in historical information compared to MPT, or CAPM representations. Academic financial research provides little specific portfolio recommendations suitable for long-term horizons. The MPT model assumes investors make decisions myopically in a single period framework. The Merton continuous-time model assumes investors make decisions dynamically based on intertemporal hedging over multiple periods. The DPT model assumes investor's make dynamic decisions based on longer holding periods in a static single period model. DPT analysis provides precise quantitative advice for short, intermediate, and long holding periods.Quadratic MPT does not permit users to specify the size in solution portfolios. An integer constraint added to linear DPT is useful to meet portfolio size requirements. This paper extends DPT to control portfolio size and empirically examines feasible size regions and in-sample optimal allocations for alternative levels of systematic, unsystematic and horizon length risk. The empirical test examines long only DPT solutions from a universe of 73 industries for a 16-year period that includes the October 1987 stock market crash. Optimal portfolios and feasible sizes are examined for three strategies; low versus high total risk, active versus passive, and short versus long horizon risk. Low-risk optimal portfolios and active optimal portfolios are smaller with fewer feasible size possibilities. Optimal industry allocations change with holding period and expectations. Long-term investors should hold smaller portfolios. The majority of allocations are not myopic; however a buy-and-hold strategy is appropriate for some sectors. Gold, oil, gas, and tobacco are included in solutions over multiple holding periods. This study contributes to the theory and practice of portfolio selection and optimization as well as to the question of holding period and horizon risk.