Prior theory suggests that time variation in the degree to which leverage constraints bind affects the pricing kernel. We propose a measure for this leverage constraint tightness by inverting the ...argument that constrained investors tilt their portfolios to riskier assets. We show that the average market beta of actively managed mutual funds—intermediaries facing leverage restrictions—captures their desire for leverage and thus the tightness of constraints. Consistent with theory, it strongly predicts returns of the betting-against-beta portfolio, and is a priced risk factor in the cross-section of mutual funds and stocks. Funds with low exposure to the factor outperform high-exposure funds by 5% annually, and for stocks this difference reaches 7%. Our results show that the tightness of leverage constraints has important implications for asset prices.
I propose and test a capital-flow-based explanation for some well-known empirical regularities concerning return predictability—the persistence of mutual fund performance, the "smart money" effect, ...and stock price momentum. First, I construct a measure of demand shocks to individual stocks by aggregating flow-induced trading across all mutual funds, and document a significant, temporary price impact of such uninformed trading. Next, given that mutual fund flows are highly predictable, I show that the expected part of flow-induced trading positively forecasts stock and mutual fund returns in the following year, which are then reversed in subsequent years. The main findings of the paper are that the flow-driven return effect can fully account for mutual fund performance persistence and the smart money effect, and can partially explain stock price momentum.
Traditionally, mutual funds are mostly managed via an ad hoc approach, namely a terminal‐only optimization. Due to the intricate mathematical complexity of a continuum of constraints imposed, effects ...of the inter‐temporal reward for the managers are essentially neglected in the previous literature. For instance, the inter‐temporal optimal investment problem from the fund manager's viewpoint, who earns proportional management fees continuously (a golden rule in practice), has been outstanding for long. This article completely resolves this challenging question especially under generic running and terminal utilities, via the Dynamic Programming Principle which leads to a nonconventional, highly nonlinear HJB equation. We develop an original mathematical analysis to establish the unique existence of the classical solution of the primal problem. Further numerical calibrations and simulations for both the portfolio weight and the value functions illustrate the robustness of the optimal portfolio towards the manager's risk attitude, which allows different managers with various risk characteristics to sell essentially the same investment vehicle. Simulation studies also indicate that the policy of charging a substantial terminal‐only management fee can be replaced by another one with only a negligible amount over the interim period, which substantially reduces the total management fee paid by the clients without lowering the manager's satisfaction at all; this last observation echoes the magic of the alchemy of finance.
Investment funds that claim to focus on socially responsible stocks have proliferated in recent times. In this paper, we verify whether ESG mutual funds actually invest in firms that have ...stakeholder-friendly track records. Using a comprehensive sample of self-labelled ESG mutual funds (as identified by Morningstar) in the United States from 2010 to 2018, we find that these funds hold portfolio firms with worse track records for compliance with labor and environmental laws, relative to portfolio firms held by non-ESG funds managed by the same financial institutions in the same years. Relative to other funds offered by the same asset managers in the same years, ESG funds hold stocks that are more likely to voluntarily disclose carbon emissions performance but also stocks with higher carbon emissions per unit of revenue. Despite these findings, ESG funds hold portfolio firms with higher average ESG scores. We show that ESG scores are correlated with the quantity of voluntary ESG-related disclosures but not with firms’ compliance records or actual levels of carbon emissions. Finally, ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees. Our findings suggest that socially responsible funds do not appear to follow through on proclamations of concerns for stakeholders.
Exchange-Traded Funds 101 for Economists Lettau, Martin; Madhavan, Ananth
The Journal of economic perspectives,
01/2018, Letnik:
32, Številka:
1
Journal Article
Recenzirano
Odprti dostop
Exchange-traded funds (ETFs) represent one of the most important financial innovations in decades. An ETF is an investment vehicle, with a specific architecture that typically seeks to track the ...performance of a specific index. The first US-listed ETF, the SPDR, was launched by State Street in January 1993 and seeks to track the S&P 500 index. It is still today the largest ETF by far, with assets of $178 billion. Following the introduction of the SPDR, new ETFs were launched tracking broad domestic and international indices, and more specialized sector, region, or country indexes. In recent years, ETFs have grown substantially in assets, diversity, and market significance, including substantial increases in assets in bond ETFs and so-called “smart beta” funds that track certain investment strategies often used by actively traded mutual funds and hedge funds. In this paper, we begin by describing the structure and organization of exchange-traded funds, contrasting them with mutual funds, which are close relatives of exchange-traded funds, describing the differences in how ETFs operate and their potential advantages in terms of liquidity, lower expenses, tax efficiency, and transparency. We then turn to concerns over whether the rise in ETFs may raise unexpected risks for investors or greater instability in financial markets. While concerns over financial fragility are worth serious consideration, some of the common concerns are overstated, and for others, a number of rules and practices are already in place that offer a substantial margin of safety.
We investigate the dual notions that “dumb money” exacerbates well-known stock return anomalies and “smart money” attenuates these anomalies. We find that aggregate flows to mutual funds (dumb money) ...appear to exacerbate cross-sectional mispricing, particularly for growth, accrual, and momentum anomalies. In contrast, hedge fund flows (smart money) appear to attenuate aggregate mispricing. Our results suggest that aggregate flows to mutual funds can have real adverse allocation effects in the stock market and that aggregate flows to hedge funds contribute to the correction of cross-sectional mispricing.
This study proposes that the performance of mutual fund managers is linked to how efficiently they allocate attention across assets in their investment set. Motivated by existing models of optimal ...portfolio choice and rational inattention, we posit that the efficiency of attention allocation increases when a manager chooses larger (smaller) active positions in assets that need more (less) information acquisition effort to resolve uncertainty about future payoffs. We show that the efficiency of attention allocation has a significantly positive impact on future fund performance. Efficient attention allocation has a lesser impact on performance as the total demands on a manager's limited attention increase.
We analyze brokerage data and an experiment to test a cognitive dissonance based theory of trading: investors avoid realizing losses because they dislike admitting that past purchases were mistakes, ...but delegation reverses this effect by allowing the investor to blame the manager instead. Using individual trading data, we show that the disposition effect—the propensity to realize past gains more than past losses—applies only to nondelegated assets like individual stocks; delegated assets, like mutual funds, exhibit a robust reverse-disposition effect. In an experiment, we show that increasing investors' cognitive dissonance results in both a larger disposition effect in stocks and a larger reverse-disposition effect in funds. Additionally, increasing the salience of delegation increases the reverse-disposition effect in funds. Cognitive dissonance provides a unified explanation for apparently contradictory investor behavior across asset classes and has implications for personal investment decisions, mutual fund management, and intermediation.
We examine the impact of investor coordination on governance. We identify coordinating groups of investors (cliques) as those connected through the network of institutional holdings. Clique members ...vote together on proxy items: a one standard deviation increase in clique ownership more than doubles votes against low quality management proposals. We use the 2003 mutual fund trading scandal to show that this effect is causal. These findings suggest coordination strengthens governance via voice. Coordination, however, also weakens governance via threat of exit. Clique owners exit positions more slowly, and firm value responds negatively to liquidity shocks when clique ownership is high.
I examine how the investment behavior of bond mutual funds affects corporate financing decisions. Mutual funds that hold a firm’s existing bonds have a high propensity to acquire additional new ...issuances from the same firm. I utilize this stylized fact to construct a firm-specific bond capital supply measure by aggregating flows from a firm’s existing bondholders. Firms with a higher flow-driven capital supply are more likely to issue bonds, enjoy lower yields, and substitute away from equity financing and bank loans. Information acquisition costs and underwriter relationship likely contribute to the impact of flow-driven capital supply.
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