Fees Eat Diversification's Lunch

Jennings, William W.; Payne, Brian C.

doi:10.2139/ssrn.2543031

Cited by 4 publications

(4 citation statements)

References 21 publications

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“…However, differential variable and fixed transaction costs exist, and so transaction costs can affect portfolio composition and relative portfolio performance. Jennings and Payne (2016) argue that alternative assets have such high transaction costs that they make diversification into these assets unattractive. In Section 5 our estimates show that emerging markets have the highest transaction costs, equities, commodities, hedge funds, real estate and private equity all have the same transaction costs, and bonds have the lowest transaction costs.…”

Section: Transaction Costsmentioning

confidence: 99%

Harmful diversification: Evidence from alternative investments

Platanakis

Σάκκας

Sutcliffe

2019

The British Accounting Review

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Alternative assets have become as important as equities and fixed income in the portfolios of major investors, and so their diversification properties are also important. However, adding five alternative assets (real estate, commodities, hedge funds, emerging markets and private equity) to equity and bond portfolios is shown to be harmful for US investors. We use 19 portfolio models, in conjunction with dummy variable regression, to demonstrate this harm over the 1997-2015 period. This finding is robust to different estimation periods, risk aversion levels, and the use of two regimes. Harmful diversification into alternatives is not primarily due to transactions costs or non-normality, but to estimation risk. This is larger for alternative assets, particularly during the credit crisis which accounts for the harmful diversification of real estate, private equity and emerging markets. Diversification into commodities, and to a lesser extent hedge funds, remains harmful even when the credit crisis is excluded.

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Section: Transaction Costsmentioning

confidence: 99%

Harmful diversification: Evidence from alternative investments

Platanakis

Σάκκας

Sutcliffe

2019

The British Accounting Review

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“…For example, Jennings and Payne (2016) found that the benefits of diversifying into more exotic asset classes, such as private equity and infrastructure, quickly disappear when higher fees are considered. They also found that high fees consume much of the advantage of additional return premiums in alternative asset classes.…”

Section: Prior Research On Excess Diversificationmentioning

confidence: 99%

What Free Lunch? The Costs of Overdiversification

McKayShawn

ShapiroRobert

ThomasRic

2018

Financial Analysts Journal

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“…Prior research has documented the return benefits of portfolio concentration (c.f., Goldman et al, 2016;Jennings and Payne, 2016;McKay et al, 2018) and have often ascribed it to an information advantage (Ke and Petroni, 2004;Kacperczyk et al, 2005;Cohen et al, 2008Cohen et al, , 2010. This is largely because most of the proposed reasons for investment concentration predict no association or an ambiguous relation between concentration and performance; yet only the more sophisticated institutional investor's use of the NHTSA complaint data because less sophisticated investors are likely to overlook data that is harder to interpret and that requires more time and attention to assimilate due to the time needed and the cognitive difficulty in extracting usable information from complex data sources (Bloomfield, 2002).…”

Section: Introductionmentioning

confidence: 99%

Trading Concentration and Industry-Specific Information: An Analysis of Auto Complaints

Geiger,

Keskek,

Kumas

2018

SSRN Journal

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We investigate whether sophisticated investors' trading concentration in the auto industry is associated with their use of auto complaint data. We find that the extent to which mutual funds incorporate the complaint information into their trading decisions is positively associated with their concentration of trading in the auto industry. We provide direct evidence that information advantage can arise from superior information processing. We find that pension funds, regardless of their level of trading concentration, do not use the customer complaint information to inform their trading decisions. Our findings suggest that pension funds concentrate trading for reasons other than information advantage. JEL Classification: G14 1.information advantage reason predicts a purely positive relation (Kacperczyk et al., 2005;Ekholm and Maury, 2014;Hiraki et al., 2015). However, prior research has generally not identified nor investigated the kind of information advantage utilized by concentrated investors.Information advantage can occur in two ways: 1) obtaining private information (i.e., information asymmetry), and 2) superior processing or analysis of public information based on the investor's superior ability, prior experience, knowledge or expertise (i.e., specialization) (Bodnaruk and Simonov, 2015). In fact, most studies on investment concentration generally conclude that it is due to information advantage without any attempt to determine the cause. (e.g., Brands et al., 2005;Baks et al., 2006). Moreover, most earlier studies either do not distinguish between the underlying source of information advantage (e.g., Kacpercyzk et al., 2005) or assume that it arises from private information without testing this assumption (e.g., Ekholm and Maury, 2014;Jiang and Sun, 2014). Examination of specific sources of possible information advantage, or its use by investors, is sparse, perhaps because testing the information advantage reason for investor behavior is difficult as the nature, timing, and information content of an investor's actual information set is usually unobservable by researchers. Specifically, the possibility of investment concentration occurring out of an investor's superior ability to utilize public information rather than having access to private information has yet to be examined. In this study, we address this issue by utilizing a value relevant, industry-specific information source that is available to all investors that could be exploited as an informational advantage, if a sophisticated investor so desired. Specifically, we examine whether institutional investors that have greater trading concentration in the auto industry are more likely to exploit the product complaint data freely available from the National Highway Traffic Safety Administration (NHTSA). We examine the

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Fees Eat Diversification's Lunch

Cited by 4 publications

References 21 publications

Harmful diversification: Evidence from alternative investments

Harmful diversification: Evidence from alternative investments

What Free Lunch? The Costs of Overdiversification

Trading Concentration and Industry-Specific Information: An Analysis of Auto Complaints

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