Showing papers on "Investment management published in 2000"

The Rise of Sector Effects in Major Equity Markets

Abstract: Historically, country effects have been dominant in explaining variations in global stock returns, even in the developed markets, and investors have segmented their allocations accordingly. We set out to investigate whether this situation still prevails. We found a significant shift in the relative importance of national and economic influences in the stock returns of the world's largest equity markets. In these markets, the impact of industrial sector effects is now roughly equal to that of country effects. In addition to supporting the notion of increasing global capital market integration, these findings suggest that country-based approaches to global investment management may be losing their effectiveness.

Pension Fund Capitalism

Abstract: The State in Retreat Pension Fund Capitalism Functional and Spatial Structure of investment Management Competition and Innovation in Investment Management Pension Fund Trustee Decision Making Corruption and Investment Decision Making Four models of Financial Intermediation Provision of Urban Infrastructure Contested Terrain Community and Solidarity

A demystification of the Black–Litterman model: Managing quantitative and traditional portfolio construction

Abstract: One of the major difficulties in financial management is trying to integrate quantitative and traditional management into a joint framework. Typically, traditional fund managers are resistant to quantitative management, as they feel that techniques of mean-variance analysis and related procedures do not capture effectively their value added. Quantitative managers often regard their judgmental colleagues as idiot savants. Senior management is rarely prepared to intervene when managers are successful and profitable, however they made their decisions. These disharmonies can make company-wide risk-management and portfolio analysis non-operational and can have deleterious effects on company profitability and staff morale.

The use of asset management companies in the resolution of banking crises - cross-country experience

Abstract: Asset management companies have been used to address the overhang of bad debt in the financial system. There are two main types of asset management company: those set up to expedite corporate restructuring and those established for rapid disposal of assets. A review of seven asset management companies reveals a mixed record. In two of three cases, asset management companies for corporate restructuring did not achieve their narrow goal of expediting bank or corporate restructuring, suggesting that they are not good vehicles for expediting corporate restructuring. Only a Swedish asset management company successfully managed its portfolio, acting sometimes as lead agent in restructuring - and helped by the fact that the assets acquired had mostly to do with real estate, not manufacturing, which is harder to restructure, and represented a small fraction of the banking system's assets, which made it easier for the company to remain independent of political pressures and to sell assets back to the private sector. Asset management companies used to dispose of assets, rapidly fared somewhat better. Two of four agencies (in Spain and the United States) achieved their objectives, suggesting that asset management companies can be used effectively for narrowly defined purposes of resolving insolvent and inviable financial institutions, and selling off their assets. Achieving these objectives required an easily liquefiable asset - real estate - mostly professional management, political independence, adequate bankruptcy, and foreclosure laws, appropriate funding, skilled resources, good information and management systems, and transparent operations and processes. The other two agencies (in Mexico and the Philippines) were doomed from the start, as governments transferred to them politically motivated loans or fraudulent assets, which were difficult for a government agency susceptible to political pressure and lacking independence to resolve or sell off.

A Cat Bond Premium Puzzle

Abstract: Catastrophe bonds, the payouts of which are tied to the occurrence of natural disasters, offer insurers and corporate entities the ability to hedge events that could otherwise impair their operations to the point of insolvency. At the same time, cat bonds offer investors a unique opportunity to enhance their portfolios with an asset that provides a high-yielding return that is uncorrelated with the market. Despite the attractive nature of these investments, spreads in this market remain considerably higher than the spreads for comparable speculative-grade debt. This article uses behavioral economics to explain the reluctance of investment managers to invest in these products. Finally, we use simulations to illustrate the attractiveness of cat bonds under a wide range of outcomes, including the possible effects of model uncertainty on investor appetite for these securities.

Overconfidence, Investor Sentiment, and Evolution

Abstract: We examine the long-run survival of non-rational traders in a dynamic evolutionary model. Specifically, we develop a general population dynamic for a large economy with rational and non-rational traders according to the process of wealth accumulation in asset markets. The dynamic indicates that the growth rate of wealth accumulation drives the evolutionary process in asset markets. This endogenously determined group wealth accumulation process distinguishes our evolutionary model from previous models with exogenous imitation processes. We apply the population dynamic to examine the survival of overconfident traders in a pairwise contest and the survival of noise traders in a playing-the-field contest. We find that neither underconfident nor bearish sentiment can survive. On the other hand, investors with moderate overconfidence or bullish sentiment can survive in the long run. Furthermore, these moderately aggressive investors may dominate the market if fundamental risk in the market is sufficiently large. These findings provide interesting new empirical implications for the survivability of active fund management. Overall, our results lend support to the relevance of the psychology of investors with respect to either overconfidence or sentiment for the study of financial markets.

Performance of UK equity unit trusts

Abstract: Studies of money manager performance are the bottom line test of market efficiency. They do not claim to uncover specific types of market failure as do the ‘anomalies’ literature of the 1980s and the behavioural finance literature of today. Rather, money manager studies ask whether there are market failures, regardless of type, that are systematically exploitable. In our opinion, the conclusion of the literature to date is a resounding ‘No’.

Method and system for exchange of financial investment advice

Abstract: A method and system for distributing professional investment advice to investors is provided. A computerized exchange system permits one or more advisors to make investment strategies available to subscribing investors. Each strategy defines a sequence of trade transactions that are consistent with strategy parameters and are designed to achieve the risk and return objectives of the strategy. The strategies are distributed to subscribers who can undertake the recommended transactions using separate brokerage accounts. A subscriber can maintain a corresponding portfolio that assigns weighting factors to various strategies in order to provide a customized investment strategy. Accordingly, the exchange system can provide professional fund manager trading decisions to individual investors in near real time without the administrative burdens or costs associated with traditional mutual funds.

Credit Analysis of Financial Institutions

Abstract: Banks/lending to banks insurance companies investment banks finance companies leasing companies investment management companies pension funds.

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.

Value-based metrics : foundations and practice

Abstract: Investors, shareholders, and corporate leaders looking for an edge in today's New Economy are moving beyond traditional accounting yardsticks toward new means of gauging performance and profitability. An increasing number of Wall Street analysts and corporate boards are adopting valuebased metrics such as EVA, MVA, and CFROI as a measure of a firm's profitability because these standards adjust for all of the firm's cost of capital equity as well as debt. James Grant tackled the issue of economic value added in its infancy with Foundations of Economic Value Added one of the first primers on the topic, endorsed by its creator, G. Bennett Stewart. Now, in Value Based Metrics: Foundations and Practice, he and Frank Fabozzi head a team of some of the leading proponents of value based metrics on both the investment management side and the corporate side. This comprehensive reference outlines how corporations and analysts can use value based metrics to more accurately measure the financial performance of individual companies, industries, and economies, as well as how to get an edge in today's turbulent market.

Where Berle and Means went wrong: a reassessment of capital market agency and financial reporting

Abstract: This paper assesses the effects of Berle and Means' study of the separation of corporate ownership from control on corporate financial reporting theory, research and policy. Their focus on shareholders and managers provided a starting point for the subsequent development of agency theory such that this relationship has come to dominate capital markets research and policy, to the virtual exclusion of parallel issues involving other parties. Berle and Means' omission of the role of investment funds led them to conclude that the separation of ownership from control problems was located between shareholders and company managers. We document the inaccuracy of this conclusion using historical and contemporary US evidence and contemporary evidence for Germany, Japan, South Africa, and Canada. In contrast to Berle and Means, we find that investment fund influence and control over companies is pervasive and probably a common characteristic of modern capital markets. Our analysis shows how viewing the capital markets setting from a richer, two-tier perspective involving investors, investment managers, and company managers results in quite different and better perspectives on financial reporting issues, particularly in terms of company reporting to funds, and fund reporting to investors. Consequently, we suggest that our understanding of capital markets may be improved by studying and portraying more diverse types of parties and their relationships than just managers and owners. This perspective subsumes the single-tier principal-agent model and allows multiple relationships to be portrayed and studied.

Investments: Analysis and Behavior

Abstract: Part 1: Introduction to Investments 1 Introduction 2 Equity Markets 3 Buying and Selling Equities 4 Risk and Return Part 2: Market Efficiency and Investor Behavior 5 Asset Pricing Theory and Performance Evaluation 6 Efficient-Market Hypothesis 7 Market Anomalies 8 Psychology and the Stock Market Part 3: Investment Analysis 9 Business Environment 10 Financial Statement Analysis 11 Value-Stock Investing 12 Growth-Stock Investing 13 Technical Analysis Part 4: Fixed Income 14 Bond Instruments and Markets 15 Bond Valuation Part 5: Investment Management 16 Mutual Funds 17 Global Investing 18 Option Markets and Strategies 19 Futures Markets 20 Real Estate and Tangible Assets Appendix A: The Time Value of Money and Compounding Appendix B: Chartered Financial Analyst Questions Glossary Index

Risk Aversion and the Investment Horizon: A New Perspective on the Time Diversification Debate

Abstract: Investment managers generally subscribe to the principle of time diversification. This implies that a larger portion of the portfolio should be devoted to risky assets as the investment horizon increases. In contrast, academics have shown that for investors with utility functions characterized by constant relative risk aversion, the optimal asset-allocation strategy is independent of the investment horizon. The relative risk aversion in these studies is assumed to be constant both with respect to wealth as well as investment horizon. We suggest a utility function that explicitly captures the notion that individuals are more risk tolerant when the investment horizon is long, thereby validating the intuitively appealing time diversification argument.

The Concept of Investment Efficiency and its Application to Investment Management Structures

Abstract: Investment efficiency is a function of the risk, return and total cost of an investment management structure, subject to the fiduciary and other constraints within which investors must operate. Institutional investors implement their investment policies through investment management structures. In this paper the aim is to enhance the investment management structure by broadening the financial objectives, by recognising the effect of behavioural issues and by incorporating governance constraints. We therefore suggest that investment efficiency should be considered as a combination of financial efficiency and non-financial efficiency.Modern portfolio theory had a revolutionary effect on portfolio construction. In the same way, we believe that investment management structures should be constructed in a more disciplined and quantitative manner. In this paper we outline the quantitative and qualitative methods by which these structures can be developed. The proposed new framework for designing investment management structures seeks to optimise net information ratios while simultaneously recognising the level of regret risk facing fiduciaries, minimising non-financially-productive behavioural biases and taking account of the resources available to the fiduciary to monitor these structures.

Paying for pensions: An international comparison of administrative charges in funded retirement-income systems

Abstract: High charges for personal pensions were one factor in the personal pensions mis-selling debacle in the United Kingdom. They continued to arouse concern among politicians and commentators. The Labour government, with its new flagship ‘stakeholder’ pension, chose to regulate both the structure of charges and their level. This paper assesses the international experience of charges in funded retirement-income systems, drawing on evidence from fourteen countries with very diverse policies. Measuring the price of financial services is more difficult than comparing the cost of other goods or services. Providers can levy many different kinds of charges. These can include one-off and ongoing charges; proportional and fixed-rate fees; some based on contributions, some on the value of assets in the fund and some on investment returns. These different charges accumulate and interact in Complicated ways over the membership of a pension plan. The most familiar summary measure of charges is the ‘reduction in yield’. This adds together all the charges over the lifetime of an example pension policy and expresses them as a percentage of assets. Measuring charges as a proportion of contributions is the alternative. This turns out to be the same as calculating lifetime charges as a proportion of the balance accumulated at retirement. This second measure is known as the ‘reduction in premium’ or the charge ratio. The fourteen countries surveyed (Section 2) adopt very different approaches. At one end of the spectrum, Australia and the United Kingdom (with personal pensions) have completely liberal policies on charge levels and structures, but require providers to set out the effect of charges in a standard format. Most Latin American countries, including Argentina and Chile, restrict the charge structure: in these cases, allowing a fixed fee plus a charge as a proportion of contributions. Poland, too, limits the types of fee that can be levied, but also limits funds to charging 0.6 per cent of assets, while other charges are uncapped. Sweden, Kazakhstan and the United Kingdom (with stakeholder pensions) restrict both the charge structure and the charge level. In the last two, there is a fixed ceiling while Sweden varies the cap using a complex formula based on the amount that providers charge to manage voluntary savings. Finally, Bolivia auctioned the rights to manage its mandatory pension fund assets to international fund managers. The empirical evidence from these countries charge levels. In countries with systems based on individual accounts and individual choice among competing pension providers, average charges vary from under 15 to above 30 per cent. The paper assesses the options and the arguments for ontrolling charges. Measures to increase transparency comprise requirements for providers to disclose the level of charges, public provision of information in charge ‘league tables’ and allowing charges to be levied on top of rather than out of mandatory pension contributions. If governments choose to restrict charge structures, to facilitate comparisons between different providers, the most important policy choice is between contribution-based levies and asset-based fees. Latin American countries have tended to opt for the former, the United Kingdom has chosen the latter for stakeholder pensions. The main issues in this choice are the time profile of providers’ revenues, fund managers’ incentives to maximise returns and the incidence of the charges on different providers. Restricting charge levels raises some important concerns, particularly about governments’ ability to choose the ‘right’ level for the ceiling and the trade-offs in terms of restricting competition and individual choice of fund. Many of these policies to limit charges are aimed particularly at protecting low-income workers. But some countries have adopted alternative policies: for example, excluding low-income workers from the requirement to contribute and protecting them with safety-net pensions in old-age or cross-subsidising low-income workers directly with a minimum contribution from the government. Some commentators have suggested alternative institutional structures for managing funded pension assets to reduce costs. However, empirical evidence shows that publicly managed pension funds have generated poor returns. Also, the evidence on economies of scale in fund management suggests that the minimum efficient scale is relatively small and does not imply the presence of efficiency gains from a monopoly in managing funded pensions except in small economies. Again, there are important trade-offs in these policies, including corporate governance problems and the restriction of competition and individual choice.

Disclosing Disaggregated Information

Abstract: How companies and auditors have met the challenge. For many years, analysts and other users of external financial reports have expressed concern about the form and usefulness of the segment reporting companies include in these statements. Analysts believe that understanding the components of a multifaceted enterprise is vital to obtaining a complete understanding of that business. Financial statement users expressed great dissatisfaction with the information companies presented in financial reports prepared in compliance with FASB Statement no. 14, Financial Reporting for Segments of a Business Enterprise, issued in 1976. Because the definition of an industry, segment under Statement no. 14 was imprecise (to accommodate a wide variety of businesses subject to the rule) the result was that companies provided only limited information. Disclosures made under Statement no. 14 were not helpful to financial statement users. In some cases, businesses exploited the imprecision of the industry segment definition to avoid providing useful information. Both the AICPA Special Committee on Financial Reporting and the Association for Investment Management and Research noted the importance of segment data and the shortcomings of Statement no. 14. The groups stressed the need for a company to present segment data in the same way it organized and managed its business. FASB responded by issuing Statement no. 131, Disclosures about Segments of an Enterprise and Related Information. Statement no. 131 was effective for fiscal years beginning after December 15, 1997. While it appeared, at first reading, to be straightforward, Statement no. 131 has proven to be quite subtle and complex. Quality disclosures do not come easily. The nature of the required disclosures increases the level of risk for management and auditors alike. Management faces increased competitive risk as a result of competitors knowing more about the company. Most companies guard information on the profitability of segments carefully. If too much information is revealed in financial statements, the company could lose its negotiating advantage in an acquisition. Auditors, in turn, face the risk of not knowing how the SEC will respond to disclosures on which the auditor had rendered an opinion. If the auditor discloses too much information, the client faces a competitive disadvantage. Disclosing too little might raise the ire of the SEC. Prepared properly, however, the required disclosures can prove useful to both management and statement users, particularly when compared to Statement no. 14. A number of issues have arisen since companies began applying Statement no. 131, including implementation issues confronting both financial managers and outside auditors. To help CPAs better understand them, this article offers some examples of how some businesses have applied Statement no. 131. THE BASICS OF THE NEW APPROACH The exhibit on page 49 summarizes the requirements of Statement no. 131. The statement adopts a management approach to defining segments and uses the term operating segment rather than industry segment. An operating segment is a component of an enterprise * That engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses related to transactions with other components of the enterprise). * Whose operating results are regularly reviewed by the enterprise's chief operating decision maker to decide how to allocate resources to the segment and assess its performance. * For which discrete financial information is available. This definition includes reporting separately segments that sell their products or services primarily or exclusively to other operating segments of the enterprise if management reports these segments separately for decision-making purposes. Statement no. 131 requires information only about reportable operating segments. …

Knowledge Assets Professional's Guide to Valuation and Financial Management

Abstract: This guide provides a financial framework for analyzing the costs, benefits and risks connected with investing in the knowledge asset of a company. It combines tools from value-based management and financial economics to create a method for valuing knowledge strategies, programmes and projects.

An Evolutionary Approach to Multiperiod Asset Allocation

Abstract: Portfolio construction can become a very complicated problem, as regulatory constraints, individual investor’s requirements, non-trivial indices of risk and subjective quality measures are taken into account, together with multiple investment horizons and cash-flow planning. This problem is approached using a tree of possible scenarios for the future, and an evolutionary algorithm is used to optimize an investment plan against the desired criteria and the possible scenarios. An application to a real defined benefit pension fund case is discussed.

Chasing Hot Funds: The Effects of Relative Performance on Portfolio Choice

Abstract: We study the way in which SEC restrictions on fund manager compensation affect portfolio choice when investors buy into funds whose recent performance has been good. We find that fund managers choose riskier portfolios than they would if there were no contracting restrictions and that these portfolios are riskier than the optimal risky portfolio. Further, if investors choose funds according to performance rank rather than performance relative to the average, these effects are exacerbated—fund managers choose even riskier portfolios. Thus, our analysis suggests a need to provide investors with information about risk-adjusted performance.

Introduction to Finance

Abstract: 1. The Financial Environment: Firms, Investors and Markets. I. THE FINANCIAL MARKETPLACE. 2. Financial Institutions and Markets. 3. Corporate Securities: Bonds and Stocks. 4. Interest Rate Fundamentals. II. FINANCIAL TOOLS FOR FIRMS AND INVESTORS. 5. Time Value of Money. 6. Risk and Return. 7. Valuation. 8. Financial Statements and Analysis. III. FINANCIAL MANAGEMENT. 9. The Firm and Its Financial Environment. 10. Capital Budgeting: Cash Flow Principles. 11. Capital Budgeting Techniques: Certainty and Risk. 12. Cost of Capital. 13. Capital Structure and Dividends. 14. Financial Planning. 15. Short-Term Financial Management. IV. INVESTMENT MANAGEMENT. 16. Investment Information and Transactions. 17. How External Forces Affect Firm's Value. 18. Investing in Stocks. 19. Investing in Bonds. 20. Mutual Funds and Asset Allocation. 21. Derivative Securities. V. HOW INVESTORS MONITOR AND CONTROL A FIRM'S MANAGERS. 22. Corporate Control and Governance. Appendix A. Financial Tables. Appendix B. Answers and Solutions to Self-Test Exercises. Appendix C. Fantasy Stock Market Game Web Exercise. Credits. Index.

German Social Market in the World of Global Finance: Pension Investment Management and the Limits of Consensual Decision Making

Abstract: In a previous paper we emphasised the changing national and international accounting standards used to measure net pension liability. Beginning with the implications of this analysis for the financing of German employer-sponsored pensions, in this paper we focus upon the internal management of corporate pension assets and liabilities. Two issues drive the analysis. One has to do with the emerging coalescence of interests joining corporate management and shareholders in relation to the management of pension assets and liabilities. The second issue has to do with the allocation of risk and uncertainty between social partners when negotiating the financing and final value of promised retirement income. We analyse the importance of workers' risk aversion and the widely-held goal of stable long-term real incomes for the management of pension assets. In the context of global financial markets, we suggest that the institutional framework of investment decision making common to many of Germany's largest firms is under considerable pressure; three models of investment decision making relevant to pension assets and liabilities are used to illustrate this point. Contrasts are drawn with competing systems of corporate governance, noting the incorporation of pension financing into Anglo-American corporate treasuries. Implications are drawn with respect to the changing status of German employer-sponsored supplementary pensions in relation to debate over the future of social security and social insurance.

Paying for pensions: An international comparison of administrative charges in funded retirement-income systems

Abstract: High charges for personal pensions were one factor in the personal pensions mis-selling debacle in the United Kingdom. They continued to arouse concern among politicians and commentators. The Labour government, with its new flagship ‘stakeholder’ pension, chose to regulate both the structure of charges and their level. This paper assesses the international experience of charges in funded retirement-income systems, drawing on evidence from fourteen countries with very diverse policies. Measuring the price of financial services is more difficult than comparing the cost of other goods or services. Providers can levy many different kinds of charges. These can include one-off and ongoing charges; proportional and fixed-rate fees; some based on contributions, some on the value of assets in the fund and some on investment returns. These different charges accumulate and interact in Complicated ways over the membership of a pension plan. The most familiar summary measure of charges is the ‘reduction in yield’. This adds together all the charges over the lifetime of an example pension policy and expresses them as a percentage of assets. Measuring charges as a proportion of contributions is the alternative. This turns out to be the same as calculating lifetime charges as a proportion of the balance accumulated at retirement. This second measure is known as the ‘reduction in premium’ or the charge ratio. The fourteen countries surveyed (Section 2) adopt very different approaches. At one end of the spectrum, Australia and the United Kingdom (with personal pensions) have completely liberal policies on charge levels and structures, but require providers to set out the effect of charges in a standard format. Most Latin American countries, including Argentina and Chile, restrict the charge structure: in these cases, allowing a fixed fee plus a charge as a proportion of contributions. Poland, too, limits the types of fee that can be levied, but also limits funds to charging 0.6 per cent of assets, while other charges are uncapped. Sweden, Kazakhstan and the United Kingdom (with stakeholder pensions) restrict both the charge structure and the charge level. In the last two, there is a fixed ceiling while Sweden varies the cap using a complex formula based on the amount that providers charge to manage voluntary savings. Finally, Bolivia auctioned the rights to manage its mandatory pension fund assets to international fund managers. The empirical evidence from these countries charge levels. In countries with systems based on individual accounts and individual choice among competing pension providers, average charges vary from under 15 to above 30 per cent. The paper assesses the options and the arguments for ontrolling charges. Measures to increase transparency comprise requirements for providers to disclose the level of charges, public provision of information in charge ‘league tables’ and allowing charges to be levied on top of rather than out of mandatory pension contributions. If governments choose to restrict charge structures, to facilitate comparisons between different providers, the most important policy choice is between contribution-based levies and asset-based fees. Latin American countries have tended to opt for the former, the United Kingdom has chosen the latter for stakeholder pensions. The main issues in this choice are the time profile of providers’ revenues, fund managers’ incentives to maximise returns and the incidence of the charges on different providers. Restricting charge levels raises some important concerns, particularly about governments’ ability to choose the ‘right’ level for the ceiling and the trade-offs in terms of restricting competition and individual choice of fund. Many of these policies to limit charges are aimed particularly at protecting low-income workers. But some countries have adopted alternative policies: for example, excluding low-income workers from the requirement to contribute and protecting them with safety-net pensions in old-age or cross-subsidising low-income workers directly with a minimum contribution from the government. Some commentators have suggested alternative institutional structures for managing funded pension assets to reduce costs. However, empirical evidence shows that publicly managed pension funds have generated poor returns. Also, the evidence on economies of scale in fund management suggests that the minimum efficient scale is relatively small and does not imply the presence of efficiency gains from a monopoly in managing funded pensions except in small economies. Again, there are important trade-offs in these policies, including corporate governance problems and the restriction of competition and individual choice.

Asset Management in Europe

Abstract: Detailed information about commissions, the profits and losses of individual asset management firms, and country-by-country results have always been hard to find, for in Europe the business is an opaque one. The only sure thing is that the industry is quite profitable. In an attempt to fill this gap in knowledge, McKinsey conducted a survey of 33 European asset management companies, which hold a total of $1.2 trillion worth of assets under management-about 30 percent of European third-party assets. The survey focused on the amount and nature of those assets as well as on staffs, revenues, and costs. All major countries of Western Europe were represented, with a sufficient number of observations to estimate averages for 1998 and to make comparisons across countries (Exhibit 1). Our survey confirmed that Europe's asset management market still offers opportunities for profitable growth despite increasing competitive pressures. The average operating profit is 21 basis points (hundredths of a percentage point) of the value of assets under management, though the level of profit in individual countries varies widely--from 9 basis points in Germany to more than 40 in Spain and Portugal (Exhibit 2, on the previous page). This range of variation reflects differences in the net revenues of asset managers more than differences in their cost structures. Average net revenues (gross sales fees and income from management fees, less payments to distribution channels) are 35 basis points--23 basis points for German firms, for example, and 53 basis points for Iberian ones. Many factors affect the level of revenue: the type of assets managed (revenues from equities are higher than those from fixed-income investments or money market funds); customer segments (retail fees are higher than institutional ones); investment styles (fees for active stock selection are higher than those for passive index tracking); revenue-sharing agreements with distribution channels; the ability to realize hidden fees from trading or brokering; and the transparency or stage of development of the market (the Benelux countries, for example, are further advanced than Spain). Costs vary comparatively little across Europe, ranging from an average of 11 basis points of assets under management in the Iberian countries to 17 basis points in the United Kingdom. Distribution costs vary by channel, compensation costs by the maturity of markets, and back-office costs by types of client. The mix of assets is among the main drivers of costs: equity funds, for instance, cost twice as much (5.1 basis points) to manage as fixed-income funds (2.6) and more than four times as much as money market funds (1.2). Nonetheless, the cost of managing equity funds is surprisingly similar from one country to another (Exhibit 3): differences in the value of the assets each staff member manages typically offset differences in costs per fund manager. UK fund managers must pay higher compensation levels, which are linked to the cost of doing business in the London market; French and German firms have to cover high social welfare costs. Not surprisingly, size matters in the asset management business, since its fixed costs are high. Large firms earn profits that are 25 percent (5 basis points) higher than those of their smaller domestic competitors. Economies of scale come mainly from sales and marketing as well as from information technology and support (Exhibit 4). In the retail business, up to 80 percent of total costs are fixed and thus don't rise with increases in the number of customers or the amount of assets managed. Such a high share of fixed costs should give large, very focused players a huge competitive advantage. Nonetheless, we found that large Continental fund managers don't capture the whole benefit of scale--a weakness they must tackle. Increasingly, firms have to become specialist managers, offering small sets of products to large client bases instead of broad product ranges to smaller client bases. …

Is direct investment in international property markets justifiable

Abstract: This paper critically assesses the relative merits of indirect and direct methods of international property investment. Despite similarities in the underlying asset base, each offers different qualities in terms of information costs, diversification, management and transaction costs, liquidity, volatility and quality of performance measurement. It is argued that direct investment will only be justifiable where investors are confident that they have the ability to identify underpriced assets, can manage these assets as effectively as local companies and can handle the investment risks associated with such lumpy, illiquid assets. It is concluded that for many investment funds, indirect investment in specialist property investment companies would seem to offer a more suitable method of gaining exposure to international property markets. In general indirect markets are more transparent, information costs are lower, liquidity is higher (with consequent implications for portfolio asset allocation decisions) and performance measurement is less problematic.

The Risk‐Return Paradox in Local Government Investing

Abstract: This study contrasts expected utility theory in the form of modern portfolio theory (MPT) with a descriptive psychological analysis in the form of prospect theory. For local government investment managers, the assumptions underlying MPT are violated in the manner predicted by prospect theory. Findings confirm the notion that local government investment managers are risk-averse when facing an investment gain and risk-seeking when facing an investment loss. Although a number of researchers have appealed to prospect theory to explain firm and industry risk patterns, the utility of prospect theory in public sector organizations is questioned. This study finds that irrespective of their personal disposition toward risk, local government chief investment officers defer to a compelling public interest when making investment decisions for their organization.

The Efficient Market Hypothesis, the Gaussian Assumption, and the Investment Management Industry

Abstract: The purpose of this paper is to disclose how the Gaussian form of the concept of market efficiency is at the origin of the contemporary professional debate on passive index-linked management which continues on despite the growing popularity of indexing among investment management practitionners in Europe. This particular Gaussian form entered the investment management industry in the 1970's and carries strong assumptions about the behavior of returns and the structure of the information set. We argue that this ill-defined debate on indexing is due to a confusion between efficiency and Gaussian efficiency. The originality of the paper resides in the point of view choosen as the "main thread". Instead of focusing on informational issues, now better understood since the seminal paper of Grossman and Stiglitz (1980), we concentrate on the probabilistic aspects included in the testable applications of the concept, so as to connect Fama's statement of 1970 to Bachelier's work (Theory of Speculation) of 1900. We establish the link between Bachelier's dissertation and portfolio management applications of market efficiency. We argue that understanding the precise characteristics of the link associating the informational efficiency concept itself with the underlying probabilistic hypothesis leads to a better approach to the problems facing the investment management industry and allows us to understand the professional impact of the Gaussian form of efficiency. The issues of non normality of empirical distributions (fat tails problem) and concentration of performance are linked with the efficiency paradigm so introducing a rationale for the the new and emerging concept of model risk, which today appears relevant to the investment management industry.

Financial management method and system

Abstract: A method and system in a remote computer network ( 80 ) for interactively managing financial information, wherein the remote computer network ( 80 ) has at least one client ( 92 ) connectable to one or more servers ( 88 ). Initially, a deal center database can be designated wherein deal information is stored ( 384 ). An investment management database may be then specified wherein investment management information is stored ( 386 ). A financial management database is thereafter established, wherein financial management information is stored ( 388 ). Each of the databases are then integrated with one another in the remote computer network ( 80 ) to thereby permit users to access information stored in the databases utilizing the remote computer network ( 80 ). A deal center interface can then be specified for interactively accessing deal center information stored in the deal center database ( 390 ), in addition to an investment management interface for interactively accessing investment management information stored in the investment management information database ( 392 ). Finally, a financial management interface is established for interactively accessing financial management information stored in the financial management information database. Each of the interfaces are integrated with one another ( 394, 396, 398, 400 ) in the remote computer network to thereby permit users to access information stored in the databases through the interfaces.