“…By allowing for investor misperceptions we can ask whether money managers find it profitable to pander to investor tastes, or whether they choose fee structures that correct investor errors. Answering this question may allow us to address what appears to be the empirically relevant possibility of investment advisors underperforming passive strategies even before fees (Malkiel (), Gil‐Bazo and Ruiz‐Verdú (), Del Guercio, Reuter, and Tkac ()), as well as study the determinants of product proliferation in the money management industry. We proceed in two steps.…”
Section: Biased Expectations Of Asset Returns and Panderingmentioning
We present a new model of investors delegating portfolio management to professionals based on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge fees. Money managers compete for investor funds by setting fees, but because of trust fees do not fall to costs. In equilibrium, fees are higher for assets with higher expected return, managers on average underperform the market net of fees, but investors nevertheless prefer to hire managers to investing on their own. When investors hold biased expectations, trust causes managers to pander to investor beliefs.* The authors are from Universita Bocconi and IGIER, Harvard University, and University of Chicago, respectively. We are grateful to Charles Angelucci, Nicholas Barberis, John Campbell, Roman Inderst, Sendhil Mullainathan, Lubos Pastor, Raghuram Rajan, Jonathan Reuter, Joshua Schwartzstein, Charles-Henri Weymuller, Luigi Zingales, Yanos Zylberberg, and especially a referee for extremely helpful comments. Disclosure: Shleifer was a co-founder of LSV Asset Management, a money management firm, but is no longer a shareholder in the firm. Shleifer's wife is a partner in a hedge fund, Bracebridge Capital. Vishny was a co-founder of LSV Asset Management. He retains an ownership interest.
“…By allowing for investor misperceptions we can ask whether money managers find it profitable to pander to investor tastes, or whether they choose fee structures that correct investor errors. Answering this question may allow us to address what appears to be the empirically relevant possibility of investment advisors underperforming passive strategies even before fees (Malkiel (), Gil‐Bazo and Ruiz‐Verdú (), Del Guercio, Reuter, and Tkac ()), as well as study the determinants of product proliferation in the money management industry. We proceed in two steps.…”
Section: Biased Expectations Of Asset Returns and Panderingmentioning
We present a new model of investors delegating portfolio management to professionals based on trust. Trust in the manager reduces an investor's perception of the riskiness of a given investment, and allows managers to charge fees. Money managers compete for investor funds by setting fees, but because of trust fees do not fall to costs. In equilibrium, fees are higher for assets with higher expected return, managers on average underperform the market net of fees, but investors nevertheless prefer to hire managers to investing on their own. When investors hold biased expectations, trust causes managers to pander to investor beliefs.* The authors are from Universita Bocconi and IGIER, Harvard University, and University of Chicago, respectively. We are grateful to Charles Angelucci, Nicholas Barberis, John Campbell, Roman Inderst, Sendhil Mullainathan, Lubos Pastor, Raghuram Rajan, Jonathan Reuter, Joshua Schwartzstein, Charles-Henri Weymuller, Luigi Zingales, Yanos Zylberberg, and especially a referee for extremely helpful comments. Disclosure: Shleifer was a co-founder of LSV Asset Management, a money management firm, but is no longer a shareholder in the firm. Shleifer's wife is a partner in a hedge fund, Bracebridge Capital. Vishny was a co-founder of LSV Asset Management. He retains an ownership interest.
“… For evidence on fund performance, see, for example, Jensen (1968), Grinblatt and Titman (1989), Elton, Gruber, Das, and Hlavka (1993), Hendricks, Patel, and Zeckhauser (1993), Malkiel (1995), Brown and Goetzmann (1995), Ferson and Schadt (1996), Gruber (1996), Daniel, Grinblatt, Titman, and Wermers (DGTW) (1997), Baks, Metrick, and Wachter (2001), Kosowski, Timmermann, White, and Wermers (2001), Carhart, Carpenter, Lynch, and Musto (2002), Lynch, Wachter, and Boudry (2004), Cohen, Coval, and Pástor (2005), and Mamaysky, Spiegel, and Zhang (2005). …”
Mutual fund managers may decide to deviate from a well-diversified portfolio and concentrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the performance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries. Copyright 2005 by The American Finance Association.
“…The four-factor model is estimated for all the 223 funds over a 14-year sample period, and there are 15,479 monthly alphas and factor 11. See, for example, Malkiel (1995).…”
Section: Comparison Of Fund Performance Between Twomentioning
We find that sensitivity of fund flows and fund performance are both related to participants' right to choose their investments in defined contribution plans. Under the Mandatory Provident Fund system of Hong Kong, both employers and employees are required to contribute to a retirement account. Originally, employees' investment choices were restricted to a subset of funds chosen by their employers. The system was later modified so that employees are allowed to invest in any fund within the system. We present evidence that flows of fund have become more sensitive to past fund performance after this policy change, and that average fund performance in the system has also improved. Based on the improvement in fund performance, we estimate the accumulated cost of the lack of choice to be around 10% of the current total asset value of the system. (JEL G14, G18)
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