Showing papers on "Investment management published in 1999"

Home Bias at Home: Local Equity Preference in Domestic Portfolios

Abstract: The strong bias in favor of domestic securities is a well-documented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several well-documented asset pricing anomalies.

A Non-Random Walk Down Wall Street

Abstract: For over half a century, financial experts have regarded the movements of markets as a random walk--unpredictable meanderings akin to a drunkard's unsteady gait--and this hypothesis has become a cornerstone of modern financial economics and many investment strategies. Here Andrew W. Lo and A. Craig MacKinlay put the Random Walk Hypothesis to the test. In this volume, which elegantly integrates their most important articles, Lo and MacKinlay find that markets are not completely random after all, and that predictable components do exist in recent stock and bond returns. Their book provides a state-of-the-art account of the techniques for detecting predictabilities and evaluating their statistical and economic significance, and offers a tantalizing glimpse into the financial technologies of the future. The articles track the exciting course of Lo and MacKinlay's research on the predictability of stock prices from their early work on rejecting random walks in short-horizon returns to their analysis of long-term memory in stock market prices. A particular highlight is their now-famous inquiry into the pitfalls of "data-snooping biases" that have arisen from the widespread use of the same historical databases for discovering anomalies and developing seemingly profitable investment strategies. This book invites scholars to reconsider the Random Walk Hypothesis, and, by carefully documenting the presence of predictable components in the stock market, also directs investment professionals toward superior long-term investment returns through disciplined active investment management.

Beyond Mean–Variance: Performance Measurement in a Nonsymmetrical World (corrected)

Abstract: Most practitioners use the capital asset pricing model to measure investment performance. The CAPM, however, assumes either that all asset returns are normally distributed (and thus symmetrical) or that investors have mean–variance preferences (and thus ignore skewness). Both assumptions are suspect. Assuming only that the rate of return on the market portfolio is independently and identically distributed and that markets are “perfect,” this article shows that the CAPM and its risk measures are invalid: The market portfolio is mean–variance inefficient, and the CAPM alpha mismeasures the value added by investment managers. Strategies with positively skewed returns, such as strategies limiting downside risk, will be incorrectly underrated. A simple modification of the CAPM beta, however, will produce 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. The risk measure requires no more info...

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 recently invited comment regarding the question, ‘‘Given [eAcient] markets, would any disservice be done to the interests of individual investors by allowing professional investors access to more extensive information?’’ [AICPA (1996) Report of the Special Committee on Financial Reporting and the Association for Investment Management and Research, New York, p. 22]. Research in psychology [e.g. GriAn & Tversky (1992) The weighing of evidence and the determinants of confidence. Cognitive Psychology, 411‐435] suggests that less-informed investors may suAer from over-confidence and trade too aggressively given their information. This paper reports on an experiment designed to address these issues. In the experiment, 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. 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. However, alerting less-informed investors to the extent of their informational disadvantage eliminates these welfare losses. The results 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. # 1999 Elsevier Science Ltd. All rights reserved.

Common sense on mutual funds : new imperatives for the intelligent investor

Abstract: ON INVESTMENT STRATEGY. On Long-Term Investing: Chance and the Garden. On the Nature of Returns: Occam's Razor. On Asset Allocation: The Riddle of Performance Attribution. On Simplicity: How to Come Down to Where You Ought to Be. ON INVESTMENT CHOICES. On Indexing: The Triumph of Experience over Hope. On Equity Styles: Tick-Tack-Toe. On Bonds: Treadmill to Oblivion? On Global Investing: Acres of Diamonds. On Selecting Superior Funds: The Search for the Holy Grail. ON INVESTMENT PERFORMANCE. On Reversion to the Mean: Sir Isaac Newton's Revenge on Wall Street. On Investment Relativism: Happiness or Misery? On Asset Size: Nothing Fails Like Success. On Taxes: The Message of the Parallax. On Time: The Fourth Dimension-Magic or Tyranny? ON FUND MANAGEMENT. On Principles: Important Principles Must Be Inflexible. On Marketing: The Message Is the Medium. On Technology: To What Avail? On Directors: Serving Two Masters. On Structure: The Strategic Imperative. ON SPIRIT. On Entrepreneurship: The Joy of Creating. On Leadership: A Sense of Purpose. On Human Beings: Clients and Crew. Afterword. Appendices. Notes. Index.

Playing by the rules: ethical criteria at an ethical investment fund

Abstract: Although ethical investment is a growing phenonenon which attracts a signficant amount of media interest, relatively little has been written about the internal operations of ethical investment funds. Using a variety of sources, including interviews with a fund manager and participant observation at meetings of the fund’s ethical advisory committee, this paper examines the decision making of one ethical unit trust operating in the United Kingdom. In particular, it describes the development of the ethical criteria and the ways in which their implementation was monitored. Several significant parallels between publicly stated ethical investment criteria and corporate codes of ethics are then discusssed.

Corporate Real Estate Research within the Academy

Abstract: This study discusses the uniqueness and importance of corporate real estate (CRE) asset management and distinguishes it from third party real estate investment management. A decline in CRE research...

Derivatives and Risk Management

Abstract: A process for using derivatives to manage risk should be integrated into an investor9s investment management strategy. The authors discuss the changing risk environment, which has given rise to a more strategic focus on risk management. They examine the role of derivatives in risk management and demonstrate how various instruments can be applied to specific types of identifiable risk.

Spectral analysis of real estate and financial assets markets

Abstract: Understanding cyclical activity is an important component of efficient portfolio management. Property appraisal models that do not explicitly take into account cyclical fluctuations may produce unrealistic valuation estimates resulting in property assets being incorrectly added to or removed from the general investment portfolio. In this paper we use conventional spectral analysis techniques to examine property and financial assets for evidence of cycles and co‐cycles. One finding is that the very pronounced cyclical patterns that appear in direct real estate markets and the economy as a whole are very much less obvious once they have filtered through to securitised property markets and financial assets markets.

Financial Reporting, Private Disclosure and the Corporate Governance Role of Financial Institutions

Abstract: This paper explores how large UK financial institutions (FIs) pursued a private corporate governance agenda with their portfolio companies. It also investigates the role of financial reporting in private and public corporate governance. The case financial institutions argued that the limited quality of public information, especially in financial reports, was a major constraint on their ability to act in fund management and corporate governance roles. However, the financial reporting cycle determined a private institutional and company meeting cycle and this created opportunities for private information collection and for governance influence by FIs. In addition, the perceived limitations of public governance mechanisms such as voting encouraged private governance approaches. As a result, the case financial institutions had the incentive and the means to improve the quality of their sources of corporate information and to obtain a competitive edge over other financial institutions and the market through their direct contact with companies. Despite the limitations of public information, the paper reveals how public disclosure in financial statements and the financial reporting cycle played a central role in corporate governance. Public sources of information were combined with private sources to create a financial institutional knowledge advantage. The institutions used this knowledge to diagnose problem areas in strategy, management quality, and the effectiveness of the board, and their impact on financial performance. The financial reporting cycle meant that the quasi insider financial institution had the access opportunity and the joint public/private insight to influence companies across a wide corporate governance agenda and in a range of corporate circumstances. The case institutions exploited these private access and knowledge advantages for investment purposes and for Cadbury style corporate governance purposes. Thus, the private governance process was critically dependent on the FI knowledge advantage, which in turn relied on both financial reports and private disclosure. This wide ranging governance behaviour by institutions corresponds to recommendations subsequently made by the Hampel report in 1998 concerning UK corporate governance. The paper ends by exploring how the private institutional and company meeting agenda can suggest new directions for financial reporting and public disclosure and how this can further improve public and private corporate governance.

Tax advantaged transaction structure (TATS) and method

Abstract: A tax advantage transaction structure (TATS) and method directs that a first entity assigns disposable property it owns to a second entity in exchange for a contingent installment obligation. The disposable property is further assigned by the second entity to a third entity in exchange for monetary proceeds. Second entity then causes an investment manager to invest the monetary proceeds in an investment portfolio containing financial securities selected by the first entity. Returns on the investment portfolio are transferred to the second entity and are thereafter paid to first entity in periodic installments in satisfaction of the contingent installment obligation.

How Financial Firms Decide on Technology

Abstract: The financial services industry is the major investor in information technology in the US economy; the typical bank spends as much as 15% of non-interest expenses on IT A persistent finding of research into the performance of financial institutions is that performance and efficiency vary widely across institutions Nowhere is this variability more visible than in the outcome of the IT investment decisions in these institutions This paper presents the results of an empirical investigation of IT investment decision processes in the banking industry The purpose of this investigation is to uncover what, if anything, can be learned from the IT investment practices of banks that would help in understanding the cause of this variability in performance along with pointing toward management practices that lead to better investment decisions Using PC banking and the development of corporate Internet sites as the case studies for this investigation, the paper reports on detailed field-based surveys of investment practices in several leading institutions

Challenges and opportunities for Islamic banking and finance in the west: The United Kingdom experience

Abstract: Islamic finance has become increasingly significant in financial centres in the West, notably London, despite the regulatory hurdles presented by operating in a nonMuslim financial environment. The growth of Islamic finance partly reflects demand from Muslim resident and non-resident clients for Islamic deposit facilities and fund management services which involve shari’ah compliance. At the same time Islamic financing methods are viewed as a challenge and opportunity by Western bankers, many of whom have sought to get involved in this growing industry. In client driven societies there is a willingness by those in financial services to listen and learn from the experiences of Islamic banks, which in the longer run may bring a major break through for Islamic banking at the retail level in the West. London has emerged as the major centre for Islamic banking and finance in the West. The aim of this paper is to examine the characteristics of the British market for Islamic banking and financial services and analyse the activities of the major institutions involved. Regulatory issues are covered, which present a particular challenge in an environment where hitherto little account has been taken of the needs and preferences of Muslim clients, especially with regard to those who wish to respect the shari’ah which prohibits interest based transactions. Islamic financial products offered at the retail level include investment accounts, Islamic portfolio management, commodity and equity based fund management facilities and Islamic mortgages. Muslim corporate clients can obtain short and medium term trade finance as well as leasing terms for equipment, although this is on a very limited scale at present, with Al Baraka as the main provider. Islamic project finance can be arranged for both private and state organisations from Muslim countries, such financing usually being United States dollar denominated, although other currencies can be arranged on request.

Fund Management Changes and Equity Style Shifts

Abstract: We examined changes in performance, risk, and investment style for mutual funds that changed managers during the 1983–91 period. Results show that funds experiencing a managerial change performed poorly before the change, primarily as a result of inferior security selection. Risk-adjusted performance, on average, improved 200 basis points annually and systematic risk increased significantly after the management change. We also classified funds according to their equity “effective mix” of company sizes and value versus growth. More than 65 percent of the funds experienced a shift in investment style after the management change.

The Global Asset Management Industry: Competitive Structure 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 of 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 performed 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.

The practice of investment management in Hong Kong: market forecasting and stock selection

Abstract: This is the first survey study in Hong Kong on the practice of investment management in terms of stock market forecasting and stock selection. Our respondents come from different sectors of the investment industry. Hong Kong has became one of the most important centres for fund management industry. Thus, it is important for international investors to acquire a better understanding of how investment professionals or analysts in Hong Kong practice their trades. The respondents were asked to rate the relative importance of a number of techniques for stock analysis. There are three major categories of techniques in the survey, namely fundamental analysis, technical analysis and portfolio analysis. Our results indicate that Hong Kong analysts rely more on fundamental and technical analyses and rely less on portfolio analysis. Also, investment horizon, analysts' backgrounds and their company attributes have some association with the relative importance of the techniques the analysts use for stock analysis.

The emerging pension fund management market in Latin America

Abstract: This article examines the emergence of a pension fund management market in Latin America following extensive pension reform in the region. The key feature of pension reform in Latin America has been the partial or total replacement of unfunded social insurance pension schemes with individual capitalisation pension plans. The establishment and development of a pension fund management sector is key to the success of the reforms.

Should the United States Privatize Social Security

Abstract: The two papers that make up the core of this book address what is perhaps the most fundamental question in the current debate over Social Security: whether to shift, in part or even entirely, from today's pay-as-you-go system to one that is not just funded but also privatized in the sense that individuals would retain control over the investment of their funds and, therefore, personally bear the associated risk. John Shoven argues yes, Henry Aaron no. Theoretical issues such as the likely effects on saving behavior and capital formation figure importantly in this discussion. But so do a broad array of practical considerations such as the expense of fund management and accounting, questions about how the public would regard the fairness of any new system, and the impact of recent developments in the federal budget and the U.S. stock market.

Return Attribution for Commercial Real Estate Investment Management

Abstract: In this study, we offer a refinement to a return attribution method proposed by the pioneers of return attribution analysis. Returns for the aggregate portfolio are decomposed into selection and allocation contributions as originally presented. We introduce the use of a neutral effect, which aggregates to zero at the portfolio level, that insures proper interpretation of the decomposition of the sector returns of the portfolio into selection and allocation contributions. This refinement is particularly relevant to private real estate investment, where portfolio performance is measured against both an aggregate benchmark and benchmarks for sub-sectors. In addition, we suggest a methodology for performing multi-period attribution analysis. Further, we offer a new presentation format to report both single and multi-period return attributes.

Inferring Periodic Variability of Private Market Returns as Measured by σ from the Range of Value (Wealth) Outcomes over Time

Abstract: This article offers an objective mechanism for computing the periodic risk of a private investment portfolio. Such determination was derived by examining the dispersion of the portfolio investments’ terminal wealth. A portfolio manager can use the tools offered to compare the risks and returns of private and public market investments and to determine optimal asset allocation. Additionally, in evaluating private investment managers, a portfolio manager can use the equations derived in this article to determine the implied periodic risks being taken.

Return Attribution for Commercial Real Estate Investment Management

Abstract: Executive Summary. In this study, we offer a refinement to a return attribution method proposed by the pioneers of return attribution analysis. Returns for the aggregate portfolio are decomposed in...

Investment Management and Technology: Past, Present, and Future

Abstract: This paper analyzes how the practice of investment management has been affected over the past 45 years by technological progress, market innovations, and advances in finance theory. Over the next few decades, as retirement-income systems around the world make the transition from "pay-as-you-go" social security to self-directed retirement accounts, the investment-management business is likely to undergo a radical transformation. There will be a growing demand for customized, integrated investment and insurance products. Financial engineering will play a major role in this transformation.

Decision criteria used by investors to screen technology-based ventures

Abstract: Entrepreneurs seeking to develop technology-based ventures require investment capital to finance their growth at the early stages Equity investors, especially venture capitalists and business angels, are known to be frequent sources of this capital Typically, entrepreneurs present an investment proposal to these investors in the form of a business plan What happens next, the decision-making process and the weighing of criterion by these investors, is of great importance to the entrepreneurs This paper explores the decision-making criteria that most impressed investors when screening an early stage technology-based venture The three types of equity investors sampled in this study are business angels, private venture capitalists and investment managers from public venture capital funds Data were collected using survey questionnaires administered through personal interviews with these investors across Canada

Off-farm investment in financial assets as a risk response for New Zealand sheep and beef farms

Abstract: Off-farm investOff-fara risk management strategy is not particularly popular among New Zealand sheep and beef farmers This study explores the potential reduction in risk by diversifying farm asset portfolios to include financial investments Portfolio analysis revealed that the negative correlation between rates of return on farm assets and shares found in the study could result in a risk reduction of as much as 20% by converting 16 to 25% of the farm investment portfolio into shares These findings indicate that off-farm investment could be an important risk response for farmers

A Tax-Aware Approach to the Management of Multiasset Class Portfolios

Abstract: This article discusses a methodology for managing a mutliasset portfolio in a tax-efficient fashion. The author starts with the need to manage a taxable portfolio as a whole and avoid a focus on the optimization of individual asset classes sub portfolios. This approach involves combining individual physical securities and derivative instruments, applied to a global equity portfolio. A variety of physical and hybrid strategies are tested to evaluate the validity of the testing methodology and the value potentially added by hybrid strategies. The article concludes that investors unwilling to consider using derivative securities should lean in the direction of passive or almost passive strategies, as very little of the manager9s pretax value-added seems to persist in an after-tax basis. By contrast, it demonstrates that a judicious use of derivative instruments together with physical securities may be able to preserve a meaningful fraction of the manager9s alpha and thus justify confidence in active investment management strategies.

Strategy, Human Resource Management, and the Performance of Life Insurance Firms

Abstract: The U.S. life insurance industry, which has been characterized by stability fostered by government regulation (Scott, O’Shaughnessy, & Cappelli, 1994), has been experiencing great turbulence from the accelerating confluence of financial services such as banking, savings and loans, investment management, and other insurance. For example, many major investment houses are beginning to cross-license their brokers to sell insurance products to clients. Banks have been offering annuity products or close substitutes to their retail customers for some time, and the entire retirement asset market has seen competition from bank products, mutual funds, and various types of standard securities offered by full-service brokers. Indeed, the differentiation between different kinds of financial services formalized by the federal government’s regulatory framework has been eroding for some time. This has created a great deal of uncertainty about appropriate strategies for financial services firms, including life insurance companies. The old sureties have disappeared and have been replaced with uncertainties.

A Cat Bond Premium Puzzle

Abstract: Catastrophe Bonds whose payoffs are tied to the occurrence of natural disasters offer insurers the ability to hedge event risk through the capital markets that could otherwise leave them insolvent if concentrated solely on their own balance sheets. At the same time, they offer investors a unique opportunity to enhance their portfolios with an asset that provides an attractive return that is uncorrelated with typical financial securities Despite its attractiveness, spreads in this market remain considerably higher than the spreads for comparable speculative grade debt. This paper uses results from behavior economics to suggest why cat bonds have not been more attractive to the investment community at current prices. In particular, the authors suggest that "ambiguity aversion", "loss aversion", and "uncertainty avoidance" may account for the reluctance of investment managers to invest in these products. In addition, since Catastrophe Bonds are a new type of investment, investors must invest time and money up front in order to educate themselves about the legal and technical complexities of the Cat Bond market before that investor can make a "to-buy or not-to-buy" decision. Such a transaction cost may reduce the attractiveness of the new bonds to the point where the investor would prefer to stay out of the market. The bulk of the paper consists of quantitative assessments of each of these hypotheses, along with a demonstration that Cat Bonds are indeed much more attractive than high yield bonds in terms of their Sharpe ratios (the ratio of the "excess return" over the risk free rate to the standard deviation of returns on the bonds). This is accomplished by simulating potential losses for hypothetical Cat Bonds under a wide variety of hurricane scenarios for the Miami/Dade county are. These findings lead the authors to suggest that issuers of Cat Bonds could themselves take steps to lower the cost of placing risk in this manner. Specifically, issuers might standardize a simple structure of terms to decrease the investor's cost of education. In addition issuers could better quantify and reduce pricing uncertainty. These steps will should increase demand for these instruments and produce a concomitant reduction in price.