Showing papers on "Investment management published in 2009"

Returns to shareholder activism: evidence from a clinical study of the Hermes UK Focus Fund

Abstract: This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies targeted by its UK Focus Fund. In contrast with most previous studies of activism, we report that the fund executes shareholder activism predominantly through private interventions that would be unobservable in studies purely relying on public information. The fund substantially outperforms benchmarks and we estimate that abnormal returns are largely associated with engagements rather than stock picking.

Physical Asset Management

Abstract: 1. Introduction to Asset Management 2. The Asset Management Function 3. From Concept to Project Approval 4. Developing a Business Case 5. Implementing Development Plans 6. Management of In-Service Assets 7. Asset Continuity Planning 8. Capital Planning and Budget 9. Discounted Cash Flow and Asset Decisions 10. Profit, Depreciation and Tax 11. Assessment Investment Criteria 12. Cost-Benefit Analysis 13. Risk Analysis and Risk Management 14. Logistic Support 15. Life Cycle Costing 16. Equipment Replacement Decisions 17. Outsourcing 18. Know Your Assets 19. Asset Management Information Systems 20. Maintenance Organization and Budget 21. Reliability, Availability, Maintainability 22. Inventory 23. Key Performance Indicators 24. PAS-55 Asset Management Specification

Ethics, Diversity Management and Financial Reporting Quality

Abstract: This article proposes and empirically tests a theoretical framework incorporating Reidenback and Robin’s (1991) conceptual model of corporate moral development. The framework is used to examine the relation of governance and business ethics, as proxied by diversity management, with financial reporting quality, as proxied by the magnitude of earnings management. The level of diversity management (DM) and governance quality are measured in accordance with the ratings of Jantzi Research (JR), a leading provider of social and governance research for institutional investors. This DM score is part of an index developed by JR that investment managers use to integrate DM criteria into their investment decisions. As expected, a negative relation between corporate DM development and FRQ is found while controlling for other factors known in the governance and accounting choices literatures to affect earnings quality. Despite some caveats presented in conclusion, this study contributes to the ethics, governance and financial reporting literatures by studying the dynamics between governance and ethics in the prevention of earnings management.

Style Drift in Private Equity

Abstract: We introduce the concept of style drift to private equity investment. We present theory and evidence pertaining to style drifts in terms of a fund manager's stated focus on particular stages of entrepreneurial development. We develop a model that derives conditions under which style drifts are less likely among younger fund managers. We also show ways in which changes in market conditions can affect style drifts, and differences for funds committed to early-stage investments compared to funds committed to late-stage investments. We find some evidence of a positive relation between style drifting and investment performance.

Rational Attention Allocation over the Business Cycle

Abstract: The literature assessing whether mutual fund managers have skill typically regards market timing or stock picking skills as immutable attributes of a manager or fund. Yet, measures of these skills appear to vary over the business cycle. This paper offers a rational explanation, arguing that timing and picking are tasks. A skilled manager can choose how much of each task to attend to. Using tools from the rational inattention literature, we show that in booms, a manger should pick stocks and in recessions, he should pay more attention to his market timing. The model predicts equilibrium outcomes in a world where a fraction of managers have skill and invest alongside unskilled investors. The predictions about funds' covariance with payoff shocks, cross-fund dispersion, and their excess returns are all supported by the data. In turn, these findings offer new evidence to support two broader ideas: that some investment managers have skill and that attention is allocated rationally.

Mutual Fund Incubation

Abstract: Incubation is a strategy for initiating new funds, where multiple funds are started privately, and, at the end of an evaluation period, some are opened to the public. Consistent with incubation being used by fund families to increase performance and attract flows, funds in incubation outperform non-incubated funds by 3.5% risk-adjusted, and when they are opened to the public, they attract higher net dollar flows. Post-incubation, however, this outperformance disappears. This performance reversal imparts an upwards bias to returns that is not removed by a fund size filter. Fund age and ticker-creation-date filters, however, eliminate the bias.

Real-Estate Investment Trusts

Abstract: This technical note provides a thorough overview of real-estate investment trusts (REITs). Created to promote and facilitate widespread public ownership of commercial real estate, REITs are companies that own real-estate properties or mortgages and that operate within certain guidelines, allowing them to qualify for REIT status. Focusing primarily on equity REITs, the note covers a broad range of issues, including valuation and its many drivers, and also examines the advantages of REIT ownership versus property ownership. The note concludes with a discussion of the future of REITs.

Inflation-Hedging Properties of Real Assets and Implications for Asset–Liability Management Decisions

Abstract: Recent increases in inflation uncertainty have increased investor awareness of the need to hedge against unexpected changes in price levels. Given that the capacity of the inflation-linked securities market is not sufficient to meet the collective demand of institutional and private investors and that the OTC inflation derivatives market suffers from a perceived increase in counterparty risk, investors are now turning to other asset classes to seek inflation protection. Using a vector error correction model that explicitly distinguishes between short-term and long-term dynamics in the joint distribution of asset returns and inflation, the authors show that real estate and commodities have particularly attractive inflation-hedging properties over long horizons and that these properties justify the introduction of these asset classes into pension fund liability-hedging portfolios. These results suggest that novel forms of liability-driven investment solutions, including commodities and real estate in addition to inflation-linked securities, can be designed to decrease the cost of inflation insurance for long-horizon investors.

System, method, and computer program product for managing a virtual portfolio of financial objects

Abstract: A system, method and/or computer program product for managing an index and/or a portfolio of financial objects. An index may be created, which may include selecting financial objects based on accounting data and/or weighting the financial objects based on accounting data. A portfolio may be created based on the index. A plurality of investment managers may manage a plurality of accounts for a plurality of investors. The investors may directly hold assets in the accounts so that the investors may take advantage of any tax benefits generated by transactions using the assets in the accounts. An investor(s) may have one or more accounts and thus one or more managers. A manager may have one or more investors and thus one or more accounts to manage. A virtual mutual fund manager may use a holdings matrix and a lot matrix to track the asset lots in the accounts. When a manager wishes to make a trade affecting an investor, the virtual mutual fund manager may determine which asset lots held by the investor should be used to execute the trade. Optionally, each investor may be associated with a tax-managed account. The tax-managed account may be used by the virtual fund manager to make deferred “paper” trades thereby avoiding certain adverse tax consequences that may be created when an investor has multiple managers. Optionally, each investor may allow loss-harvesting trades to be executed on his or her behalf in circumstances where such trades may reduce the investor's tax obligations.

Short-Term Momentum Patterns in Stock and Sectoral Return: Evidence from India

Abstract: Momentum strategies have drawn great attention in investment management literature over last two decades. In this paper we examine three important propositions in Indian context (1) Do momentum profits persist for long time periods?, (2) Can these momentum profits be absorbed by risk models?, and (3) Is stock momentum an outcome of sectoral momentum?.We develop 6-6 and 12-12 investment strategies based on past returns as well as company characteristics. We find momentum profits in Indian context for our prior return portfolios which are stronger for 6-6 compared to 12-12 strategies. These momentum profits are larger for some characteristic sorted portfolios. Risk models such as CAPM and Fama French model significantly fail to capture momentum profits. In fact, winner portfolios generally comprise of large firm and high P/B stocks, thus defying the risk story. Some zero investment momentum based trading strategies do provide significant payoffs. We also observe momentum profits in sectoral returns. A part of stock momentum profits is captured by sectoral factor, thus implying that it may mainly be an outcome of sectoral momentum. Our findings are pertinent for portfolio managers and investment analysts who are continuously in pursuit of trading strategies that provide abnormal returns.

Integrating BIM and GIS for large-scale facilities asset management: a critical review

Abstract: Widely-dispersed assets such as buildings, equipment, roads and bridges present local governments as well as big organizations with a number of asset management challenges. Recently financial sustainability and competitiveness have put more pressures on owner/managers to minimize asset total cost of ownership and streamline their asset management operations. In general asset management operation is the systematic process of maintaining, upgrading and operating physical assets. In this paper, our focus is on building assets as they often present some of the most complicated asset management problems (Eastman et al., 2008; more references). And building assets management is specified in this paper to include all the intricate tasks in all levels of the asset life-cycle, e.g. encompassing the development of new properties, maintaining and redeveloping existing estates and strategically disposing of individual buildings.

Asset-Liability Management in Private Wealth Management

Abstract: The objective of this article is to shed light on the potential benefits of asset-liability management techniques, originally developed for institutional money management, in a private wealth management context. The authors show that much of the complexity of optimal asset allocation decisions for private investors can be captured through the addition of a single state variable—liability value—which accounts in a parsimonious way for investors9 specific constraints and objectives. An asset-liability management approach to private wealth management has a direct impact on the selection of asset classes because it requires a consideration of the liability-hedging properties of various asset classes, that would, by definition, be absent from an asset-only perspective. An asset-liability perspective also leads to the use of the liability portfolio as a benchmark, or numeraire, acknowledging that, for private investors, terminal wealth per se is not as important as the investor9s ability to achieve goals, such as preparing for retirement or buying property.

Portfolio pumping : an examination of investment manager quarter-end trading and impact on performance

Abstract: Utilizing a database of daily institutional fund manager trades, we examine the contribution of strategic trading at quarter-end associated with potential ‘portfolio pumping’ or ‘ramping up’ of reported stock prices around quarter-ends. We provide the first direct evidence that active fund managers tend to purchase illiquid stocks on the last day of the quarter, in stocks in which they already hold overweight portfolio positions. Consistent with the way fund managers are evaluated, we found that the poor-performing managers display greater evidence of portfolio pumping. Both increased regulatory scrutiny and improvements to market microstructure design reduce the severity of stock price changes at quarter-ends.

Capital Flows and Hedge Fund Regulation

Abstract: This paper introduces a cross-country law and finance analysis of the regulatory impact on the level of capital flows and the sensitivity of capital flows in response to prior performance (that is, the ‘flow-performance’ relationship) in the hedge fund industry. The data indicate that distribution channels in the form of wrappers (securities that combine different products) mitigate flow-performance sensitivity. Distribution channels via investment managers and fund distribution companies enhance flow-performance sensitivity. Funds registered in countries which have larger minimum capitalization requirements have higher levels of capital flows. Funds registered in countries which restrict the location of key service providers have lower levels of capital flows. Further, offshore fund flows and calendar effects evidenced in the data are consistent with tax factors influencing capital flows. The findings are robust to selection effects for offshore registrants, among other robustness checks.

Method and system for creating and trading derivative investment instruments based on an index of investment management companies

Abstract: A method and system for creating a stock index for a group of investment management companies is disclosed. The method may include obtaining first trade information for each security representative of the group of investment management companies during a first time period, aggregating the first trade information for a predetermined time period, storing the aggregated first trade information, calculating from the aggregated first trade information an index for the group of investment management companies, determining a standardized measure of the index based on the aggregated first trade information obtained in the first time period, and periodically recalculating the index based on second trade information for each security representative of the group of investment management companies during a second time period.

Investigating the potentially contradictory microfoundations of financialization

Abstract: The existing academic literature on financialization points to multiple instances in which firms attempt to demonstrate the vitality of their stock-market position in ways which ultimately prove to be self-harming. I demonstrate, in the first instance as a matt er of immanent logic, that these actions are linked to the interplay of contradictory tendencies in the microfoundations of financialization. Under conditions of financialization, firms create additional sources of credit to capitalize their productive activities by driving their stock price into greater increases than the market average, thereby generating capital gains. Yet, the more it becomes public knowledge that the financing tricks used to inflate the stock price provide no productive benefit to the firm, the more it would seem to create incentives for fund managers to hold portfolios that replicate the stock market as a whole. In this way, they will minimize their exposure to financial misrepresentation. Such a stance undermines financialized business models, but it does in any case conform to fund managers' basic theoretical training, which revolves around the logical demonstration that an individual stock cannot systematically out-perform the market average. I review the available empirical studies of fund manager decision-making to show that they find against the existence of a simple performativity loop operating between finance theory and fund manager behaviour. However, on many points the empirical evidence does confirm the theoretically derived conclusion concerning the potentially contradictory microfoundations of financialization. Fund managers often do act in a way which is consistent with finance theory's core claim that an index-tracking strategy represents the only equilibrium portfolio, even if this is only rarely as a result of the direct performativity of the theory.

Investments: Principles and Concepts

Abstract: PART ONE BACKGROUND Chapter 1 Investing is an Important Activity Worldwide, 1 Chapter 2 Investment Alternatives: Generic Principles All Investors Must Know, 21 Chapter 3 Indirect Investing: A Global Activity, 52 Chapter 4 Securities Markets Matter to All Investors, 86 Chapter 5 All Financial Markets Have Regulations and Trading Practices, 112 PART TWO PORTFOLIO AND CAPITAL MARKET THEORY Chapter 6 Return and Risk: The Foundation of Investing Worldwide, 138 Chapter 7 Portfolio Theory is Universal, 175 Chapter 8 Portfolio Selection for All Investors, 204 Chapter 9 Asset Pricing Principles, 230 PART THREE COMMON STOCKS: ANALYSIS, VALUATION, AND MANAGEMENT Chapter 10 Common Stock Valuation Lessons for All Investors, 261 Chapter 11 Managing a Stock Portfolio: A Worldwide Issue, 296 Chapter 12 What Happens If Markets Are Efficient Or Not?, 319 PART FOUR SECURITY ANALYSIS Chapter 13 Economy/Market Analysis Must Be Considered By All Investors, 347 Chapter 14 Sector/Industry Analysis, 372 Chapter 15 Company Analysis, 388 Chapter 16 Technical Analysis, 423 PART FIVE FIXED-INCOME SECURITIES: ANALYSIS, VALUATION, AND MANAGEMENT Chapter 17 Fixed Income Securities Are Available Worldwide, 446 Chapter 18 Managing Bond Portfolios: Some Issues Affect All Investors, 475 PART SIX DERIVATIVE SECURITIES Chapter 19 Understanding Derivative Securities: Options, 504 Chapter 20 Understanding Derivative Securities: Futures, 541 PART SEVEN INVESTMENT MANAGEMENT Chapter 21 All Investors Must Consider Portfolio Management, 568 Chapter 22 Evaluation of Investment Performance: A Global Concept, 591

Tax-Aware Investment Management Practice

Abstract: The authors examine the tax-aware investment practices of investment managers managing taxable accounts. Their sample of mostly well-experienced CFA charter holders exhibits a high degree of tax awareness in investment practices. Specifically, those managers surveyed adjust clients’ return requirements and expected portfolio returns for taxes. They consider a security’s holding period when making a decision to sell and engage in periodic tax-loss harvesting. Moreover, they consider taxes when making investment selections, allocating assets among different taxable entities and managing multiple managers. In contrast, relatively few managers report portfolio performance on a tax-adjusted basis or present their performance relative to a tax-adjusted benchmark.

Supporting Investment Management Processes with Machine Learning Techniques

Abstract: IT support and especially IT innovations represent crucial success factors in investment management and financial decision making The application of machine learning techniques for intraday decision support constitutes such a crucial factor, but existing literature has not been capable of melding latest research results from both the text and the capital market research field Combining fundamental research results from both domains, it is possible to develop a forecasting model that performs better than both alternative internal (random) benchmarks and external prior research benchmarks The approach is tested by means of "classical" evaluation methods such as well as by a simulation Full paper available at conference homepage

Investment management: a modern guide to security analysis and stock selection

Abstract: [Preface]: The purpose of this book is to provide students with a realistic view of the role and activities of an equity security analyst within the investment process by building a construct of how capital markets function and teaching the “thought process” involved with securities analysis. The book will focus on three aspects of securities analysis: (1) understanding the process of analyzing companies; (2) understanding the valuation process; and (3) understanding the challenges of achieving success in a highly competitive capital market. The focus of this book is on the financial theory and empirical evidence that are useful for investment decisions. The topics covered in this book can be broadly categorized into five groups: • Financial Theories: This includes portfolio theory, the capital asset pricing model, and the arbitrage pricing theory, all of which have become an integrated part of the decision-making in investments. • Empirical Evidence in the Equity Market: This includes patterns in cross sections of stock returns and the time series behavior of stock returns. • Introduction to Fixed-Income and Credit Sensitive Instruments: This includes default-free as well as defaultable bonds; yield curve analysis; fixed-income derivatives such as swaps, caps, floors, and swaptions; models of default and ratings transitions; and more recent development of credit derivatives. • Market Efficiency and “Active” Investments: We start with the efficient market hypothesis, which is a useful framework for modeling financial markets. Like any model, the efficient market hypothesis is not a perfect description of reality: some prices are almost certainly “wrong.” Hence there are reasons to believe that active management can have effective results. Topics in active investments include security analysis, active portfolio management, hedge funds, and risk management issues. • Introduction to Behavioral Finance: While traditional finance assumes investors act rationally to maximize a well-defined utility function, behavioral finance tries to use other theories of behavior, from psychology, sociology, and anthropology, to explain financial markets. This topic will be covered by just one chapter, the main purpose of which is to get you exposed to this active and fast growing field in Finance. [Book Objectives]: A sound investment decision requires in-depth knowledge of the financial markets and rigorous analytical thinking. The main objective of this book is to teach you these three elements: • Analytical Tools: Among others, an important analytical skill you should acquire from reading this book is the ability to transform a real life investment problem into an analytical model. This modeling skill is an important aspect of this book. • Quantitative Skills: Modern finance has its quantitative aspect. Powerful mathematical techniques such as optimization, dynamic programming, probability theory, and statistical analysis pave way for many complex investment problems. In this book, you will be exposed to this quantitative aspect. • Empirical Knowledge: Essential to any investment decision is the knowledge of the investment environment. Broadly speaking, the financial instruments can be categorized into equity, debt, and derivatives. Important empirical evidence from all three types of financial markets will be examined in this book.

The Fiduciary Principle: No Man Can Serve Two Masters

Abstract: The concept of fiduciary duty—essentially “no man can serve two masters”—is centuries old. But over the past few decades too many institutional money managers have placed their own interests ahead of the principals that they represent (largely mutual fund investors and pension beneficiaries), as well as abandoning their traditional principles of long-term investing. As a result, the asset management industry’s allegiance to fiduciary standards has been seriously eroded. In this article, Bogle traces the causes of the current financial and economic crisis back to this shift in ethical values, citing a litany of violations of fiduciary duty by mutual fund managers. Drawing on the prescient wisdom of Justice Harlan Fiske Stone, Benjamin Graham, and John Maynard Keynes, Bogle argues for a federal statute of fiduciary duty for institutional managers, demanding due diligence and high professional standards in security selection, the exercise of the rights and responsibilities of corporate governance, and the elimination of conflicts of interest. The goal: to build a new financial world that serves the public interest and interests of investors.

The Mutual Fund Industry

Abstract: Over the last few decades, many asset management firms have experienced levels of decreasing or low profitability. Strategic decisions in asset management firms are thus being Increasingly confronted with the need to anticipate changes In the Industry structure and the dynamics of these changes to (re)position Itself along the four core criteria of success In that very Industry. These four key factors can be Illustrated by providing access to hard-to-get securities at a product level, In offering superior diversification potential and sufficient liquidity to customers when looking at portfolios, and fourth, In differentiating oneself at a firm level by means of lower transaction costs. One concept that allows these demands to be met by the general asset management Industry Is collective Investment schemes, such as mutual funds.

Data Classification Algorithms

Abstract: Machine-learning methods use computerized algorithms to discover the knowledge inherent in data. These methods have received considerable attention in the past ten years and have been applied to all areas of business. Two practical types of machine learning that can be used in investment management are decision trees and algorithms for generating rules. Before choosing a method, however, practitioners must make a number of careful decisions.This presentation comes from the Blending Quantitative and Traditional Equity Analysis conference held in Boston, Massachusetts, on March 30-31, 1994.

Governance and Fund Management in the Chinese Pension System

Abstract: The Chinese pension system is highly fragmented and decentralized, with governance standards, pension fund management practices, their regulation and supervision varying considerably both across the funded components of the Chinese pension system and across provinces. This paper describes the key components of the system, highlights the progress made to date and identifies remaining weaknesses, in regard to information disclosure, the governance framework and pension fund management standards.

President's working group on financial markets: best practices for the hedge fund industry

Abstract: Purpose – The purpose of this paper is to summarize two separate reports on best hedge fund industry practices issued on January 15, 2009 by the Asset Managers' Committee and the Investors' Committee of the President's Working Group on Capital Markets.Design/methodology/approach – The paper provides a detailed summary of the two reports.Findings – The Asset Managers' Committee Report sets forth a standard of best practices for the hedge fund industry aimed at reducing systemic risk and fostering investor protection. It recommends that hedge fund managers adopt comprehensive best practices in all aspects of their businesses, including the following five key areas: disclosure; valuation; risk management; trading and business operations; and compliance, conflicts and business practices. The Investors' Committee Report sets forth guidelines intended to “enhance market discipline, mitigate systemic risk, augment regulatory safeguards regarding investor protection, and complement regulatory efforts to enhance m...

Public Pension Plan Asset Allocations

Abstract: During the recent financial crisis, public-sector pension plans have seen large declines in the value of their investment portfolios. This has affected entities from school districts, to local governments, to state governments. Among the most deeply affected in dollar terms was the California Public Employees' Retirement System (CalPERS), whose pension fund value declined more than $81 billion in 2008, down 31 percent. The declines in the value of pension assets have brought attention to several issues, such as funding status, the rates of return used to discount plan liabilities (known as the "discount rate"), and investment strategies. And, given public-sector plan sponsors' limited ability to increase worker contributions, increasing deficits in pension plans has raised the probability that higher-than-expected employer contributions will have to be made to make up for the larger-than-previously-projected shortfall, if any. Not surprisingly, many public plan sponsors are considering how to stabilize their contributions to the plans. This paper reviews actual public pension plan contribution behavior from 2001 to 2006, pension asset allocations from 2003 to 2007, and the effect that investment performance has on employer contribution volatility. This analysis examines the volatility in employer contribution rates caused by the higher-return-seeking/higher-risk investment portfolios adopted by many pension plans, and whether plan sponsors will increase fixed-income investments in order to reduce volatility. It appears that, in the short run, a significant shift toward a lower-return investment policy in exchange for reduced volatility in employer contributions is unlikely to occur because of plans sponsors' expected high returns from current asset allocations based upon historical rates of return, their ability to use the assumed investment rate of return as the discount rate in calculating liabilities, and the understandable tendency of investment managers to not deviate from peer group investments, as fiduciary standards stress acting like other 'prudent experts' would in like circumstances.

Angel Investors: Who They are and What They Do – Can I Be One, Too?

Abstract: Angel investors go by many definitions. By all definitions, though, angels investors act as informal venture capitalists and collectively invest at least billions of dollars in thousands of entrepreneurial projects annually. Despite their importance to small businesses and entrepreneurs, angel investments have received comparatively little attention from investment managers and writers. This paper describes the advantages and disadvantages of angel investing and suggests ways for investors to extract the maximum benefits -- both pecuniary and nonpecuniary -- from angel investing.