The Endowment Challenge

The financial crisis of 2008 is nearly five years behind us, yet its impact on nonprofit organizations persists. The bull market that began in the early 1980s delivered historically strong returns for most long-term investment portfolios through 2008, but the factors that contributed to that performance may have run their course. Equity returns weakened over the past decade, and despite better results from bonds, overall portfolio returns have declined. Looking ahead, inflation is likely to remain low, but investment returns are also expected to be lower for the next few market cycles within more volatile markets. This will make it difficult for nonprofits to rebound from portfolio losses suffered in the 2008 downturn. Nonprofits face a "New Reality" of lower returns, higher volatility and increased scrutiny from boards and regulators. This paper discusses the challenges and opportunities nonprofit organizations face in a changing market environment

Decentralized investment management: evidence from the pension fund industry

The past few decades have seen amajor shift from centralized to decentralized investment management by pension fund sponsors, despite the increased coordination problems that this brings. Using a unique, proprietary dataset of pension sponsors and managers, we identify two secular decentralization trends: sponsors switched (i) from generalist (balanced) to specialist managers across asset classes and (ii) from single to multiple competing managers within each asset class. We study the effect of decentralization on the risk and performance of pension funds, and find evidence supporting some predictions of recent theory on this subject. Specifically, the switch from balanced to specialist managers is motivated by the superior performance of specialists, and the switch from single to multiple managers is driven by sponsors properly anticipating diseconomies-of-scale within an asset class (as funds grow larger) and adding managers with different strategies before performance deteriorates. Indeed, we find that sponsors benefit from alpha diversification when employing multiple fund managers. Interestingly, competition between multiple specialist managers also improves performance, after controlling for size of assets and fund management company-level skill effects. We also study changes in risk-taking when moving to decentralized management. Here, we find that sponsors appear to anticipate the difficulty of coordinating multiple managers by allocating reduced risk budgets to each manager, as predicted by recent theory, which helps to compensate for the suboptimal diversification that results through an improved Sharpe ratio. Overall, our results indicate that pension fund sponsors, at least on average, rationally choose their delegation structures.Decentralized investment management; diversification loss; coordination problems; fund manager skill; pension funds

A Review of IPO Activity, Pricing, and Allocations

We review the theory and evidence on IPO activity: why firms go public, why they reward first-day investors with considerable underpricing, and how IPOs perform in the long run. Our perspective on the literature is three-fold: First, we believe that many IPO phenomena are not stationary. Second, we believe research into share allocation issues is the most promising area of research in IPOs at the moment. Third, we argue that asymmetric information is not the primary driver of many IPO phenomena. Instead, we believe future progress in the literature will come from non-rational and agency conflict explanations. We describe some promising such alternatives.

Finance Applications of Game Theory

Traditional finance theory based on the assumptions of symmetric information and perfect and competitive markets has provided many important insights. These include the Modigliani and Miller Theorems, the CAPM, the Efficient Markets Hypothesis and continuous time finance. However, many empirical phenomena are difficult to reconcile with this traditional framework. Game theoretic techniques have allowed insights into a number of these. Many puzzles remain. This paper argues that recent advances in game theory concerned with higher order beliefs, informational cascades and heterogeneous prior beliefs have the potential to provide insights into some of these remaining puzzles.

Australia’s Retail Superannuation Fund Industry: Structure, Conduct and Performance

In this analysis of Australiaâs superannuation arrangements it is our conjecture that the structure and conduct of the retail superannuation industry in Australia directly impacts performance, resulting in the delivery of costly funds management products which add minimal value for investors over the long term. In this study, we take the perspective of an investor faced with selecting a retail superannuation fund, and explore the extent to which various differentiating characteristics (such as style, rating and cost) provide insights into fund quality which uses a variety of asset pricing models for the period 1991 through 2003. The results of this study, suggest that investors cannot garner superior risk-adjusted returns through reliance on such characteristics.Superannuation funds, Australia; Performance evaluation

Target-based Optimization in Operations Management

Ph.DDOCTOR OF PHILOSOPH

The performance of Us-based CTA funds from 2000 to 2010

CTA funds are attracting more and more investors every year due to the alleged superior skills of the CTAs allowing significant out-performance. But there is still a lack of study on their performances and their persistence. The literature uses the new model from Blocher, Cooper and Molyboga (2016) in order to analyse the performances of c.500 US-based CTA funds during an 11-year period. Following these analyses, it was discovered that these funds were truly able to deliver in average significant superior performance but the lack of persistence makes doubtful the existence of superior skills from the CTA managers allowing out-performanc

Management sub-advising in the mutual fund industry

This is a study of how contractual mechanisms can mitigate agency conflicts in sub-advised mutual funds. Sub-advising contracts allow fund families to expand their product offerings to include new investment styles and thereby gain market share. We show that costly contractual arrangements, such as co-branding, multi-advising, and performance-based compensation, can mitigate agency conflicts in outsourcing and protect investors from potential underperformance. Fund families will find it cost-effective to implement such incentive mechanisms only when investors are sophisticated in assessing manager skill. The findings help to explain why a large percentage of fund families outsource their funds to advisory firms.Rafael Zambrana acknowledges financial support from the FCT Fundação para a Ciência e a Tecnologia under the project UID/ECO/00124/2013 and POR Lisboa (LISBOA-01-0145-FEDER-007722). David Moreno and Rosa Rodríguez thank financial support from Ministerio de Economía, Industria y Competitividad (through projects ECO2016- 77807-P and ECO2015-67035-P), WRDS-UC3M (FEDER UNCC315-EE-3636), CAM grant S2015/HUM-3353 (EARLYFIN-CM) and Bank of Spain (grant PR71/15-20229)

Regulating private pension funds’ structure, performance and investments: cross-country evidence

A number of countries have introduced individual, privately managed defined-contribution accounts, where the value of the pension benefit will depend on accumulated contributions and investment returns. These schemes expose workers’ future pension benefits to a number of different risks. To try to mitigate these risks, reforming governments have often strictly regulated the pension fund management industry’s structure, performance, and asset allocation. Structural regulations often force workers to choose only one manager and one fund. So, workers are unable to diversify investments across funds, exposing them to aberrant behaviour by fund managers, and preventing portfolio adjustments according to the individual’s age, household characteristics, career profile and attitude to risk. Strict asset-allocation rules and relative performance criteria mean that pension funds often invest and perform almost identically, removing any substantive choice for workers over the allocation of their pension fund’s assets and the portfolio’s risk and returns. Concentration in the pension fund management industry is found to be higher in the new pension systems of Latin America and Eastern Europe than in most OECD countries. Concentration might be because the new pension markets are smaller than in countries with more established funded pension systems, but it could also be because of restrictions on industry structure. In Latin America, asset allocation and performance is nearly identical across pension funds. So-called ‘herding’ behaviour is almost a defining characteristics of these pension regimes. Again, this reflects, at least in part, asset allocation restrictions and strict performance regulation. There is also evidence that pension funds have often under-performed simple portfolios composed of market indices of stocks and bonds. All the rules imposed in the new systems of Latin American and Eastern Europe seem to be more stringent than in the OECD, with one exception: portfolio limits. Some OECD countries have a tighter investment regime than countries such as Argentina, Chile, Colombia, Peru and Poland. But OECD countries tend to have fewer barriers to entry and impose fewer constraints on performance than Latin American and Eastern European countries

In-house investment management: making and implementing the decision

We propose a framework that asset owners can use for making and implementing any decision to manage investments in-house. It involves addressing four elements: capabilities, costs, alignment and governance; with key aspects identified for consideration within each element. The framework draws on guidance from the literature, and insights from interviews with executives from the Australian superannuation fund industry. We also report on the interviews, where we uncover striking diversity in the approaches to deciding whether to manage in-house, and the emphasis placed on various aspects related to the perceived benefits, challenges and success factors. Our framework encompasses and unifies the wide range of viewpoints we heard from industry executives. We are supportive of in-house management, provided that the conditions are right and it is implemented appropriately