© Financial Management Association International
Edited By: Marc Lipson, University of Virginia and Raghavendra Rau, University of Cambridge
Impact Factor: 0.774
ISI Journal Citation Reports © Ranking: 2015: 59/94 (Business Finance)
Online ISSN: 1755-053X
Virtual Issue: Asset Management
From 2009 through 2013, Financial Management published 19 articles focusing on asset management. These articles span the asset management industry, from mutual funds to hedge funds, from closed-end funds to venture capital funds and retirement plans. The articles cover a variety of areas and explore many angles of focus. I think three major lines of analysis emerge. These are fairly characteristic of the stage of development of the analysis of the asset management industry. In this survey, I highlight the papers that have contributed most significantly to these three areas of analysis.
The first and traditional area of analysis is the study of performance. For example, different and new factor models are explored in “On the Use of Multifactor Models to Evaluate Mutual Fund Performance” (2009) by Joop Huij and Marno Verbeek, while performance is decomposed along timing and selectivity in “Is Timing Everything? The Value of Mutual Fund Manager Trades” (2013) by Jon A. Fulkerson. Perhaps most interestingly, “Market Cycles and the Performance of Relative Strength Strategies” (2013) by Chris Stivers and Licheng Sun explores the link between performance and business cycles and provides new insights on the relative ability of different strategies. Though these papers each provide insights into the relative performance of funds in a manner that can facilitate fund selection, the overall view is relatively gloomy for the profession as we still do not have a well-defined framework that provides a holistic view of the different elements that determine performance.
The second area of analysis focuses on managerial behavior. It is very interesting to see how the academic profession has started to apply “corporate” paradigms related the theory of the firm and the theory of organizational structure to the asset management industry. Especially good examples are “Public versus Private Ownership and Fund Manager Turnover” (2013) by John C. Adams, Sattar A. Mansi, and Takeshi Nishikawa, and “Peer Effects in the Trading Decisions of Individual Investors” (2010) by Lilian Ng and Fei Wu. Even behavioral analysis has started making an inroad, as in “How Much Does Expertise Reduce Behavioral Biases? The Case of Anchoring Effects in Stock Return Estimates” (2008) by Markku Kaustia, Eeva Alho, and Vesa Puttonen. All these papers share a common goal: to move away from a pure asset-pricing based analysis of fund performance, historically the first one to be adopted in the asset management literature, towards an approach that identifies as drivers of performance “structural” characteristics that relate the managers to their firms (compensation, peer effect, incentives, ownership, and firm control) as well as the managers’ behavioral biases.
I find these managerial behavior papers stimulating and fresh as they build on the previous analysis of performance and try to “rationalize” it within a theoretical framework that uses corporate foundations. In my opinion, the most important development in the asset management literature has been the understanding that asset managers provide an ideal testing ground to test corporate theories on managerial behavior: the data is great and the results of the actions of the managers are directly observable without waiting for the “time to build” that the traditional analysis of CEO performance relying on “CAPEX-data” entails. These papers provide superb examples of this trend.
The third set of papers is related to the growing trend present in corporate finance and emerging in asset management towards an “institutional” view of managerial behavior. The institutional framework plays a direct role in affecting and conditioning managerial behavior and therefore fund performance. For example, this view is explored for hedge funds in “A Law and Finance Analysis of Hedge Funds” (2010) by Douglas Cumming and Na Dai. These papers recognize that the institutional environment may restrict the scope of actions of the funds and indirectly affect their impact on the market.
My personal favorite institutional topic is marketing. We typically assume performance and risk should be the main parameters of the choice and that advertising should not really matter. However, this is not the case! The paper “The Effects of Advertising on Mutual Fund Flows: Results from a New Database” (2011) by Murat Aydogdu and Jay W. Wellman shows that “mutual funds rely on a common form of communication: advertising.” The authors reviewed 471,000 advertisements published by mutual fund companies over six years to assess advertising’s success in attracting new money. Amazingly enough, advertising seems to work! This result has broad implications for asset management. For example, what opportunities are created by the ability to bamboozle investors? Does an advertising effect imply more stable flows and therefore lower liquidity constraints and better performance, or does it imply lower required (and realized) performance due to lower investor pressure? Will we see an advertising arms race and excess resources devoted to that race? The key insight is that performance may not be the central concern of the industry – asset management may be a service that is not bought, but sold.