Showing papers on "Investment management published in 1998"

The Behavior of Stock Prices Around Institutional Trades

Abstract: All trades executed by 37 large investment management firms from July 1986 to December 1988 are used to study the price impact and execution cost of the entire sequence ("package") of trades that we interpret as an order. We find that market impact and trading cost are related to firm capitalization, relative package size and, most importantly, to the identity of the management firm behind the trade. Money managers with high demands for immediacy tend to be associated with larger market impact.

System for providing investment advice and management of pension assets

Abstract: An system and method for a data processor implemented system monitor (10) for enabling individual employee participants (14) to access independent professional money management for their Benefit Plan assets adapted to separate the investment management functions and fees thereof from the participant advice function and the fees thereof The system and method provides professional asset allocation advice services (12) to individual participants (14) of Benefit Plans for allocating their account balances in a Trust (20, 22, 24, or 26) specifically tailored to their individual risk tolerances and retirement funding needs A worksheet (40) is used to elicit the information necessary for the investment advisor (32) to recommend the Trust (20, 22, 24, or 26) appropriate for each individual participant (14) Each Trust (20, 22, 24, 26) holds shares in a plurality of mutual funds in varying proportions

Pension schemes as options on pension fund assets: implications for pension fund management

Abstract: This paper shows that the three principal types of funded pension scheme (defined benefit, defined contribution and targeted money purchase) are related through a set of options on the underlying financial assets held in the fund. The value of these options depends on both contribution inflows and the financial asset allocation chosen by the fund manager. The option values can therefore be used to assess both the appropriateness of the funding level and the effectiveness of the asset allocation in achieving the objectives of asset-liability management. In particular, they can be used to determine the probability of scheme insolvency.

Financial institutions, private acquisition of corporate information, and fund management

Abstract: The article describes how 27 large UK financial institutions (FIs) sought to acquire an information and influence advantage from the relationships they enjoyed with investee companies in their portfolio. The financial institutions invested much time and effort cultivating these links and contacts. The primary aim of this relationship investment decision was to produce added value in stock selection and asset allocation decisions. The resulting fund performance was the means for inancial institutions to satisfy a fiduciary duty to supply their clients with their preferred mix of return, diversification and liquidity. This problem area is investigated by using financial institutional case data to describe FI behaviour when interacting with their relationship investee companies. The article ends by analysing the case data and case structures through the perspective of inance theory.

Financial management for nonprofit organizations

Abstract: Understanding Nonprofit Organizations. Using Financial Management to Accomplish Your Mission. Finanical Roles and Responsibilities. Long-Range Financial Planning and Strategy. Developing and Managing a Financial Plan. Financial Reports. Technology Tools-Managing Information. Types and Sources of Funding for Your Program. Cash Management and Banking Relations. Managing Your Organization's Liabilities. Investment Policy and Guidelines. Investing Principles, Procedures, and Operations for Short-Term and Long-Term Endowment. Fixed-Income Securities Portfolio Management and Investment Operations. Safeguarding the Organization's Assets, People, and Property: Risk Management and Audit. Financial Policy-Internal and External. Evaluating Your Progress. Index.

Measuring the relative efficiency of fund management strategies in New Zealand using a spreadsheet-based stochastic data envelopment analysis model

Abstract: Portfolio managers can face cash outflows and possible job loss if their short-term performance temporarily lags behind the competition. The practical relevance of this problem is accentuated in New Zealand where the small number of predominantly resource-based companies has meant that a few unfortunate stock picks by New Zealand fund managers have often led to sharp and sudden divergences amongst managed fund performance. This concern over relative efficiency suggests that data envelopment analysis (DEA) could be helpful when New Zealand fund managers select portfolios, but a stochastic data envelopment analysis (SDEA) approach is necessary due to the chance element in short-term portfolio management performance. This paper proposes a spreadsheet-based numerical SDEA model based upon @RISK in order to alleviate this short-term relative performance aspect of New Zealand portfolio management. The predictive ability of the SDEA model for avoiding portfolios which will display subsequent short-term underperformance is demonstrated using New Zealand investment return data.

Global Asset Management

Abstract: Management in France. n d the early nineties, most of the largest investors in the world, such as U.S. and U.K. pension funds, did not currencyU hedge their international portfolios. Several explanations can be found for this policy. International assets, mostly stocks, represented only a tiny portion of the global portfolio of U.S. pension funds; the impact of currency risk was thus very limited, and even beneficial, as it provided an element of &versification for domestic monetary risks. In terms of return, the U.S. dollar and U.K. pound were weak currencies in the seventies and eighties, so holding strong currencies such as the yen or the deutschemark provided additional return to the international portfolio. Finally, most investors &d not feel at ease with derivatives, or were even precluded from using them. Why then go through the burden of a systematic hedging policy when currencies did not add risks to the global portfolio and contributed positively to its performance? The picture has recently changed. Both the U.S. dollar and the U.K. pound have been strong currencies relative to the yen or to other European currencies. In the U.K., where pension funds have traditionally devoted a significant proportion of their assets to foreign stocks, pension regulations have changed, leading to an increased focus on volatdity. In the US., pension funds have drastically increased the proportion of their international assets (up to more than 20% of the total fund for some of them), so that currency risk can no longer be treated as a negligible component. All ths is lea&ng

Malaysian débâcle: whose fault?

Abstract: In the immediate aftermath of the outbreak of the East Asian financial crisis in July 1997, the first generation of currency crisis theories — which had focused on public sector debt related tofiscal deficits — were very soon seen as irrelevant to South-east Asia, since most of the affected governments had consistently maintained budgetary surpluses in recent years. Many observers immediately assumed that the crises were due to poor macroeconomic management, as suggested by the second generation of theories seeking to explain currency crises.

Confidence and the Welfare of Less-Informed Investors

Abstract: In response to recommendations by the AICPA Special Committee on Financial Reporting and the Association for Investment Management and Research, the FASB has recently invited comment regarding the question ?Given [efficient] markets, would any disservice be done to the interests of individual investors by allowing professional investors access to more extensive information?? (AICPA, 1996, p 22). Research in psychology (e.g., Griffin & Tversky, 1992) suggests that less-informed investors may suffer from overconfidence and trade too aggressively given their information. This paper reports two experiments designed to address these issues. In both experiments, security values are determined by the price/book ratios of actual firms, ?more-informed? investors observe three value-relevant financial ratios derived from Value-Line reports, and ?less-informed? investors observe only one of those signals. Experiment 1 provides evidence from a pencil-and-paper task that less-informed investors are overconfident relative to their more-informed counterparts, and that this relative overconfidence is reduced by alerting investors to the extent of their informational disadvantage. Trading behavior follows the same pattern as confidence assessments. Experiment 2 provides evidence from laboratory markets that, even after market prices have stabilized after many rounds of trading, less-informed investors systematically transfer wealth to more-informed investors as a result of biased prices and overly aggressive trading, but that alerting less-informed investors to the extent of their informational disadvantage eliminates these welfare losses. The results of both experiments thus suggest that providing information to only professional investors could harm the welfare of less-informed investors if less-informed investors are not aware of the extent of their informational disadvantage.

The Global Asset Management Industry: Competitive Structure, Conduct and Performance

Abstract: The asset management industry represents one of the most dynamic parts of the global financial services sector. Funds under institutional management are massive and growing rapidly, particularly as part of the resolution of pension pressures in various parts of the world. The industry is not, however, well understood from the perspective if industrial organization and international competition, which is the focus of this paper. It begins with a schematic of asset management in a national and global flow-of-funds context, identifying the types of asset-management functions that are preformed and how they are linked into the financial system. It then assesses in some detail the three principal sectors of the asset management industry mutual funds, pension funds, and private-client assets, as well as foundations, endowments, central bank reserves and other large financial pools requiring institutional asset management services. Relevant comparisons are drawn between the United States, Europe, Japan and selected emerging-market countries. This is followed by a discussion of the competitive structure, conduct and performance of the asset management industry, and its impact on global capital markets.

Disincentives to Activism by Institutional Investors in Listed Australian Companies

Abstract: Several commentators have expressed the view that a greater level of monitoring by institutional shareholders would be a positive development in corporate governance. However, such commentators often rely upon mere exhortation as a means of achieving that end. The central aim of this paper is to show that there is an array of disincentives to the performance of detailed firm-level monitoring by institutional investors in listed Australian companies. The paper analyzes the barriers to detailed monitoring under three headings: (i) legal barriers; (ii) economic barriers; and (iii) practical and political barriers. It is argued that economic barriers are the most significant of these three types. The paper incorporates the results of an interview study conducted by the author in 1994. The interviewees were the senior executive, or a senior fund manager, of 13 major Australian investment management firms. These firms included the five largest, and seven of the eight largest, managers of listed Australian equities at the end of 1993.

Pension reform in small developing countries

Abstract: The authors provide a framework in which small countries can assess the proper role for the state and the private sector in pension policy. Based on industrial organization theory and pension economics, this framework draws on experience in small countries. The authors identify how optimal pension policies can change in small countries (those with fewer than 1 million active contributors to pension funds), explore optimal pension reform design for small countries, and incorporate other stylized assumptions about small countries into the discussion: the relatively greater international mobility of labor and capital, the greater scarcity of human capital specialized in financial supervision and tax administration, fewer independent interests, and higher political volatility and risk over long time horizons. They conclude that: 1) For small countries the Chilean model should be modified to include greater reliance on international trade in financial services -- especially services that benefit from economies of scale and scope, such as collections, account processing, and benefit payments. Such an approach would require a greater harmonization of accounting and regulatory standards between small developing countries and the countries from which financial services are imported. 2) The unbundling of pension services is more advantageous in small than in large countries. 3) The collection of contributions and the payment of benefits (which are subject to substantial economies of scale for small countries) should be mandatorily unbundled from other pension services. 4) Those services should be provided separately to ensure competition in the selection of trustees and competitive investment management services. This type of pension system design may be preferable to having a foreign firm provide all pension services. 5) When other assumptions (such as susceptibility to large gross migration flows) are combined with the assumption of a small-country base, mandatory pension systems or fiscal incentives are found to be less effective in small than in large countries. Large countries have broader contribution bases and much smaller gross migration flows, making them demographically more stable. 6) The relatively greater international migration in small countries makes full funding of pension systems even more important in small than in large countries.

The Challenge of Ethical Investment: Activism, Assets and Analysis

Abstract: The concept of a challenge implies something provoking a response, and such a title illustrates two widely held but misleading views of ethical investment: that it is confrontational and concerned with simple, negative, avoidance activity. The question of ‘avoidance’ will be dealt with later, but ‘challenge’ generates in the mind’s eye a picture of people asking awkward questions at a company’s annual general meeting, if not actually demonstrating outside it. However, that is shareholder activism, which needs to be carefully distinguished from ethical investment. The two grew up at the same time, and many of the people involved were the same, but over time they have diverged to such an extent that they can be classified as separate types of activities. The subtitle, activism, assets and analysis, refers to three aspects of the subject which seem particularly deserving of further consideration.

Comprehensive Income Disclosures and Analysts' Valuation Judgments

Abstract: We investigate whether clear disclosure of comprehensive income (CI) facilitates detection of earnings management by buy-side financial analysts and predictably affects their security price judgments. Because analysts and investors often must sort through voluminous footnotes and non-financial information to locate CI components and other value-relevant items, the Association for Investment Management and Research has recommended changes in the reporting of these items. In June 1997, the FASB issued SFAS No. 130-Reporting Comprehensive Income in response to this demand. The efficient markets hypothesis suggests that this reformatting of the financial statements should not affect analysts' judgments. However, psychology research predicts that information will not be used unless it is both available and readily processable (i.e., clear). Therefore, we argue that analysts' valuation judgments will be affected by the clarity of CI disclosure. The results of an experiment, in which 96 analysts participated, suggest that clear income statement (IS) disclosure of CI-as originally proposed in the FASB's CI Exposure Draft-enhances the transparency of a company's earnings management activities and reduces analysts' valuation judgments to the same level observed for a firm that does not manage its earnings. In contrast, we find that disclosure of CI in the statement of changes shareholders' equity-as allowed by SFAS No. 130 and likely to be adopted by a majority of US companies-is not as effective as IS disclosure in revealing earnings management. We discuss the implications of this study for users of financial accounting information and for accounting standard setters.

Winning the Loser's Game: Timeless Strategies for Successful Investing

Abstract: This book offers strategies for seizing control of your investment future - by working with the markets instead of against them. 'This remarkably insightful and lucidly written investment classic should be required reading for every serious investor' - Burton G. Malkiel, Author, "A Random Walk Down Wall Street". 'This is by far the best book on investment policy and management'. - Peter Drucker. 'Ellis has written a liberating book about investing. This book will enable you to face your money matters squarely, with intelligence and vision, and help you create a plan that will increase the security and freedom of your later years' - Byron R. Wien, Morgan Stanley. '...a 'must read'. This clearly-written book explores concepts essential to both institutional and individual investors. It is not a simplistic 'do-it-yourself' cookbook, but an elegant guide to investment truths and paradoxes' - Abby Joseph Cohen, Stock Market Strategist and Managing Director, Goldman, Sachs & Co. '...radical in its simplicity. Investors - institutional and otherwise - will find this jolt to their cherished beliefs refreshing' - Adam Smith, Adam Smith's Money World. 'An outstanding guide for the individual investor, full of sound and useful advice for making one's way through the confusing maze of our contemporary financial world' - William E. Simon, Former Secretary of the Treasury. 'What can I do to beat the markets?' It's one of today's most often asked questions. And the answer, maddening in both its simplicity and its complexity, is simple: Instead of playing the loser's game of trying to 'beat the markets', enjoy winning investing by learning how to get the markets to work for you. Through three previous editions of "Winning the Loser's Game", Charles Ellis has shown investors how the markets really work and why most investors are their own worst enemies. Relying on simple data and historical facts, Ellis argues that the most successful investors avoid short-term traps to concentrate on long-term strategies that allow time, compounding, and the natural ebbs and flows of the markets to work their magic. Charles Ellis has 40 years of experience working with the leading investment organizations around the world and is in the unique position to tell it like it is. "Winning the Loser's Game" provides dozens of sound ideas on how to be a smarter investor, and for plugging the leaks in your investment returns. From preventing unnecessarily high taxes to avoiding unconscionably high fees, this common-sense guidebook for independent investors reveals how to: match your investment program to the realities of the market and work effectively with your investment managers; make the most of the 'unfair' index fund advantage in today's tumultuous market environment; keep from getting burned by the market's inevitable up-and-down cycles; institute an annual review process that includes both your and your heirs' lifelines; and, maximize financial success through five stages, from Earning, Saving, and Investing through Estate Planning and Giving. In today's markets, an unprecedented quarter-century of performance has blinded investors to the historical base rate of investment returns. "Winning the Loser's Game" cuts through the fog like a beacon of common sense and clarity, and helps you to see how today's most highly touted shortcuts and secrets are almost always guaranteed to hurt you in the long run. With updated facts and figures and six new chapters, it sidesteps complications and formulas to provide you with the straight-talking secrets to winning investing.

Financial management practices in China: a case study approach to companies in the Shanghai region

Abstract: The objective of this study is to describe financial management practices in China by means of a qualitative, case study approach. A total of 16 firms in the Shanghai region were interviewed. The research results refer to: investment in fixed assets; financing methods and sources; dividend policy; working capital management; internationalization; and financial organization and financial departments.

Beyond mean-variance: risk and performance measures for portfolios with nonsymmetric return distributions

Abstract: Most practitioners measure investment performance based on the CAPM, determining portfolio "alphas" or Sharpe Ratios. But the validity of this analysis rests on the validity of the CAPM, which assumes either normally distributed (and therefore symmetric) returns, or mean-variance preferences. Both assumptions are suspect: even if asset returns were normally distributed, the returns of options or dynamic strategies would not be. And investors distinguish upside from downside risks, implying skewness preference. This has led to the adoption of ad hoc criteria for measuring risk and performance, such as "Value at Risk" and the "Sortino Ratio." We consider a world in which the market portfolio (but not necessarily individual securities) has identically and independently distributed (i.i.d.) returns. In this world the market portfolio will be mean-variance inefficient and the CAPM alpha will mismeasure the value added by investment managers. The problem is particularly severe for portfolios using options or dynamic strategies. Strategies purchasing (writing) fairly-priced options will be falsely accorded inferior (superior) performance using the CAPM alpha measure. We show how a simple modification of the CAPM beta can lead to correct risk measurement for portfolios with arbitrary return distributions, and the resulting alphas of all fairly-priced options and/or dynamic strategies will be zero. We discuss extensions when the market portfolio is not assumed to be i.i.d. BEYOND MEAN-VARIANCE: RISK AND PERFORMANCE MEASURES FOR PORTFOLIOS WITH NONSYMMETRIC RETURN DISTRIBUTIONS

Designing rules for demand-driven rural investment funds : the Latin American experience

Abstract: The demand-driven rural investment fund (DRIFs) is a new mechanism for decentralizing decision-making authority and financial resources to local governments and communities to use for investments of their choice They offer great promise for improving the design, implementation, and sustainability of rural development programs However, to counteract weak capacity of local governments to choose and implement projects well, central governments have often constrained the choices of communities by limiting the types of projects eligible for financing and requiring specific procedures for procurement and disbursement They also monitor compliance and often retain veto power over community choices of subprojects This study explores the extent to which well-designed DRIF rules and incentive structures can substitute for central control It looks at the different--and often conflicting--motivations of donors, central governments, and communities; and explores how rules can be devised to allow all actors to achieve their objectives It identifies the many objectives that DRIFs are meant to satisfy, and shows which are being met and which are not And it offers practical guidance about how to design DRIFs so that they effectively and sustainably promote rural development

Where, Oh Where Are the .400 Hitters of Yesteryear?

Abstract: The super investment manager seems to be disappearing, and the cause is probably ever-increasing efficiency in the equity markets.

Investment property portfolio management and financial derivatives: Paper 1

Abstract: Derivatives have been an expanding and controversial feature of the financial markets since the late 1980s. They are used by a wide range of manufacturers and investors to manage risk. This paper analyses the role and potential of financial derivatives investment property portfolio management. The limitations and problems of direct investment in commercial property are briefly discussed and the main principles and types of derivatives are analysed and explained. The potential of financial derivatives to mitigate many of the problems associated with direct property investment is examined.

More Than Profits: Selected Resources in Socially Responsible Investing

Abstract: When you sign up for the pension plan stock funds at my workplace, and others like it, you get a bit of investment counseling, which goes something like this: If you want to make more money from your investment, you have to be comfortable in taking higher risks. You might concentrate heavily on high-tech, or biotech, or emerging stock markets. These gambles sometimes make a great deal of money, although there is also the risk of losing a great deal of your initial investment if the firms or countries go sour. If you are uncomfortable with high risks, you end up investing in a wide array of long-standing domestic "blue chip" stocks. You are reasonably assured in this case of two things: moderate growth in funds and moderate risk in which you didn't make as much money as you could have. Over the last two decades or so, we have seen more people concerned with not only how much money their investments were making but also with how their pension plans made the money for their retirement. Was it made through liquor, guns, tobacco, environmental pollution, strike breaking? Such prospective pensioners have trouble sleeping, knowing that while their personal money for the future might be safe, their souls in the future might be imperiled because they individually profited from what some would call misguided or detrimental company policies and products. Out of these concerns arose mutual funds committed to socially responsible investing. This guest column by Joseph LaRose describes this movement and its critics, offering a guide for both our customers and ourselves. Socially responsible investing (SRI) has its roots in the early years of this century, starting with religious investors avoiding investments in alcohol, tobacco, and gambling. It prospered through the Vietnam War years, where it was identified primarily with anti-war activists who withheld investing in companies that sold weapons, and in the late 1970s and 1980s, when there was purposeful divestment of securities issued by firms doing business in South Africa. By the 1990s, SRI had become a widespread and rapidly growing movement, identified less with single issues than with a range of social and environmental concerns. A study released on November 5, 1997, by the Social Investment Forum concluded that the volume of assets under management in socially and environmentally responsible portfolios in the United States had climbed to $1.185 trillion. It was also reported that the number of socially responsible mutual funds had grown from 55 in 1995 to 144 (see http ://www.socialinvest.org/Inv SRItrends.htm). Most socially responsible funds operate by limiting the universe of stocks that a fund manager considers. This is done using a system of screens that exclude the stocks of companies with records inconsistent with the values of the fund and include companies whose practices are either benign or show positive contributions to those values. Critics of SRI argue that limiting stock choice by criteria other than financial compromises the performance of the fund; proponents cite studies that show that SR funds either outperform or perform competitively with the universe of unscreened stocks. The debate continues. Social investors may be individuals or institutions (e.g., pension funds, mutual fund families, religious institutions, community development funds, and foundations). Their investments include not only socially screened corporate securities but also direct involvement in local communities through economically targeted investments (ETIs), small business loans, home loans to increase affordable housing, and venture capital. The recent SRI literature reflects the growing popularity of the movement, its connection with broader endeavors to make the world a better place, and the continued financial debate. It shows that social investors are often interested in such related areas of societal change as sustainable economies, responsible consumerism, and economic redistribution. …

Credit Management Services Limited - Zambia : case study of a microfinance scheme

Abstract: Credit Management Services Limited (CMS) is a subsidiary of Molver and Company, a private company that created CMS in response to donor demand to act as a credit intermediary to the rural poor. This paper aims to document the experiences focusing on the company's changes in operations and performance in its efforts to deliver credit effectively to microenterprises owned by women. CMS first acts an intermediary between donors and small agricultural producers, traders, and fishing families, for a fee. Then it borrows from the recently established Microbankers Trust to onlend to its clients. It also provides clients with training in business, financial management, and legal services. This study focuses on Women's Micro Credit Scheme which targets women who need funds to finance small enterprises. The loans have created a positive impact on incomes of the clients. The success of CMS is largely attributable to its innovative approach to microcredit: a) portfolio diversification; b) use of existing institutions; c) transparent Management Information Systems; and d) weekly club meetings. The key lesson learned from the implementation include: a) high potential for rural savings; b) close supervision improves performance; c) women are a good credit risk; d) the value of strict contract enforcement, and e) critical minimum loan size.

Taxable Investors Need Different Strategies

Abstract: T ax-efficient investing is both a challenge and an opportunity for the investment management industry Few firms seem to recognize the importance of taxes; the same is true for many taxable investors Although taxes impose material constraints and costs in the investment process, taxable investing has not received much attention from academics, practitioners, and investors The investment world largely assumes tax-exempt investors Portfolio management and perfbrmance measurement are generally inaerent to the effect of taxes on the investors who pay them These facts are not surprising, as the tax-exempt segment is not only larger but also easier to reach than the taxable one For taxable investors, the name of the game is to stay in the game Taxable investors face several issues that those who are taxexempt do not need to address Beyond the pleasures of maintaining meticulous records and completing forms for various taxing authorities, taxable entities should use hfferent strategies from those that operate in an environment without the negative cash flow of taxes Jeffrey and Arnott [1993] demonstrate the importance of reducing turnover to a very low percentage The power of compoundmg is one of the most significant aspects of taxable investing Exhibit 1 displays pretax and after-tax returns of several investment styles using 1 actual returns and dstribution data from Morningstar over tenand twenty-year spans An important aspect of this information is that it reflects how managers act within their respective styles Among the equity styles, growth stocks have the highest pretax and after-tax returns The growth style has the highest tax efficiency (after-tax returns as a percentage of pretax returns), but also the most volathty A value approach (represented by the equity income style) has lower returns and tax efficiency but less volatility These findings are noteworthy, given several studies that conclude that a value approach is superior Whde it is beyond the scope of t h s article to address this issue, several factors could explain t h s Ifference For diversification and other reasons, value managers may not exclusively own the lowest price-tobook or price-to-earnings companies Alternatively, growth or “glamour” managers may invest in not only the most expensive stocks, but also those with more modest valuations Growth managers, with their lower yields relative to other equity styles, have tax arbitrage working in their favor, as capital gains are taxed at a lower rate than ordmary income for most investors The difference in the pretax and after-tax numbers for the equity styles is staggering Consistent with Jeffrey and Arnott, we find that there is real money in increased tax efficiency For example, if a

Voluntary Attestation in the Asset Management Industry: Its Influence on Users' Perceptions and Investment Decisions

Abstract: This study provides evidence on the influence of voluntary attestation outside of the financial statement audit setting. Information preparers can voluntarily employ an independent third party to attest to the reliability of information other than financial statement information. An issue of interest is whether voluntary attestation of information reliability influences users' perceptions and use of this information. The AICPA's Special Committee on Assurance Services has recently drawn attention to the potential role for CPAs in establishing the reliability of information other than financial statement information. Accounting firms are in a unique position to provide voluntary attestation services. However, unlike the market for financial statement auditing, many attestation services can also be performed by professionals other than CPAs. Thus, a secondary issue of import is whether the type of attester influences users' perceptions and use of attested information. The development of the Performance Presentation Standards (PPS) by the Association for Investment Management and Research provides a setting for examining these issues. PPS are voluntary reporting rules for investment managers to use in reporting historical performance results. Pension fund sponsors place money with investment managers, who select and monitor investments for the pension fund. Fund sponsors select investment managers based, in part, on the investment managers' asserted performance results. This institutional setting comprises information asymmetry between the investment manager and the fund sponsor, with an incentive by the investment manager to present performance results in a favorable light. PPS were developed to mitigate this information asymmetry. Adherence to PPS is voluntary, and attestation of PPS compliance is not required. Potential attesters of PPS compliance include accounting firms and financial services firms. We conduct an experiment in which pension fund sponsors are provided with case materials and asked whether they would recommend placing pension funds with any of a set of investment managers. We hypothesize that attestation enhances the perceived credibility of investment managers' asserted performance results, and influences fund sponsors' investment decisions. We further hypothesize that the type of attestation firm (Big 6 CPA firm; small, local CPA firm; international financial services firm; small, local financial services firm) influences fund sponsors' perceptions of information credibility and their subsequent investment decisions. Our results suggest the following. Pension fund sponsors prefer that investment managers present performance results that have been asserted to have been prepared in accordance with AIMR PPS. Further, attestation of this assertion influences fund sponsors' perceptions of information credibility. Specifically, fund sponsors perceive that attested information is more credible than information that has not been attested. We also find that when performance results have been attested by a CPA firm, fund sponsors perceive that information credibility is higher when the attestation is performed by a Big Six firm, rather than by a non-Big Six firm. Surprisingly, our experimental evidence suggests that perceived credibility of performance results is not an important determinant of a fund sponsor's investment decision.

Investment Management in the 21st Century

Abstract: Investment managers face major challenges in dealing with unrealistic investor expectations and the trend toward borderless markets. At the same time, firms must enhance their business skills, as opposed to investment skills, in order to successfully manage the complex bureaucracy and structure of modern organizations. In addition, the industry standard of using capital market theory to create an “optimal” portfolio is no longer adequate and will be replaced by an emphasis on optimizing Sharpe ratios without regard to asset allocation.

Competition and Innovation in the Anglo-American Investment Management Industry

Abstract: Pension funds are at the center of a vast, and expanding, financial services industry. Notwithstanding their significance for global and local capital markets, there are few studies of investment management firms? structure and organization particularly with respect to the production of their services. Here we provide a generalized "map" of the cost structure of the industry, referencing crucial variables found in other industry studies. This is the basis for an analysis of the production process of investment management, contrasted with widely accepted notions of production inherited from studies of manufacturing. The paper also deals with competitive practice in the investment management industry, focusing upon competition by routine and performance. Data on the performance of Australian fund managers over the period 1988-1997 are used to illustrate our argument regarding the temporal contingency of performance. The paper highlights the economic geography of the industry and the special role that financial regulation may play in distinguishing Anglo-American firms from their rivals. And the penultimate section then considers implications from the previous analysis for the product innovation process. Theoretically, the paper is inspired by concepts allied with evolutionary economics. However, we also show that the arbitrage process so essential for assumptions of progressive succession are quite fragile and subject to systematic discounting in the investment management industry.