Charles Trzcinka

Managerial Performance and the Cross-Sectional Pricing of Closed-End Funds

This paper finds that discounts and premiums of closed-end funds reflect the marketâ¬s assessment of anticipated managerial performance. Using single and multiple benchmarks, we present evidence that there is a significant and positive relation between stock fund premiums and future net asset value performance over the following year. The relation is not caused by the anticipation of future expenses. The conclusions are the same if a measure of noise-trading (or the â¬Sinvestor sentiment indexâ¬?) is subtracted from a fundâ¬s discount/premium. We also find that bond closed-end funds show no such relation between premium and net asset value performance.

What Are the Best Liquidity Proxies for Global Research

Liquidity plays an important role in global research. We identify high-quality liquidity proxies based on low-frequency (daily) data, which provide 1,000× to 10,000× computational savings compared to computing high-frequency (intraday) liquidity measures. We find that: (i) Closing Percent Quoted Spread is the best monthly percent-cost proxy when available, (ii) Amihud, Closing Percent Quoted Spread Impact, LOT Mixed Impact, High–Low Impact, and FHT Impact are tied as the best monthly cost-per-dollar-volume proxy, (iii) the daily version of Closing Percent Quoted Spread is the best daily percent-cost proxy, and (iv) the daily version of Amihud is the best daily cost-per-dollar-volume proxy.

Persistent performance in the mutual fund market: Tests with funds and investment advisers

Recent studies of mutual funds have concluded that there is some evidence of superior performance. We test for the existence of superior performance and its persistence with mutual funds and mutual fund investment advisers on a data set of monthly returns from 1979 to 1989 for 1,387 mutual funds grouped by 243 advisers. We find no evidence of superior performance or its persistence but we do find significant evidence of persistence of inferior performance. Consistent with previous studies our findings depend on the benchmark chosen, with multiple benchmarks producing a larger degree of inferior performance.

Financial Disclosure and Bond Insurance

Regulators typically assume that public financial disclosure is necessary for the efficient functioning of capital markets. Economists recognize that other mechanisms, such as insurance, can mitigate problems that occur when buyers have less information than sellers. We examine whether public financial disclosures and bond insurance are substitutes. Our data are from municipal issuers in Michigan, where financial disclosure is required by the state, and Pennsylvania, where disclosure is unregulated. We study municipal issuers because they are not covered by federal securities laws and state laws often allow issuers to choose the level of financial disclosure. Overall, we find that when disclosure is unregulated, issuers substitute between disclosure and insurance. When disclosure is required by state law, issuers use less insurance. Our results imply that required accounting disclosure is not necessarily optimal since rational issuers will trade off public disclosure and insurance when free to do so.

“Equity Style Classifications”: Comment

T he concept of “style analysis” is rapidly spreadmg in the money management business. Pension fund sponsors are increasingly demandmg that money managers identify their “investment style,” and consultants are designing ever more sophisticated ways of determining the “st)rle” of a pordblio. There are several measurement approaches. Fi.rst, the portfolio-based approach is, or is claimed to be, an intensive examination of a money manager’s portfolio and security selection procedures. Second, a factor model approach uses a statistical model in which hndamental characteristics of the securities in the portfolio are related to excess returns earned for systematic risks. Third, the “effective mix” or “correlation-based” approach estimates a statistical relationship between the time series of a portfolio’s returns and the time serie,j of a set of indexes representing passive investment strategies.

The Impact of the New York City Fiscal Crisis on the Interest Cost of New Issue Municipal Bonds

The default of a major corporation or municipality generates debate over the impact these failures have on the borrowing cost of other issuers. Theory suggests that in efficient markets individual failures by themselves should not increase the level of interest rates in a market unless the default provides unanticipated information about other issuers. The default of New York City in the summer of 1975 was believed by many to have provided information that increased the perceived risk of investors and consequently increased new issue borrowing costs in the municipal bond market. Empirical research by Forbes and Peterson [2] and Gramlich [3] supports this contention, reporting that borrowers paid as much as 119 basis points more because of the New York City crisis. A study by Hoffland [6] suggests that the impact of the default was not just temporary, but was felt long after 1975. Though less scientific, others note that during 1975 municipal borrowing costs rose to record high levels with most issues carrying their interest cost during the summer of 1975.

A Panel Study of U.S. Equity Pension Fund Manager Style Performance

The authors examine the investment performance of 292 U.S. equity pension funds in three major style categories for two consecutive twelve-quarter time periods, including survivors and non-survivors. They offer three major conclusions. First, the choice of an equity benchmark affects the magnitude of alpha. Second, it is difficult to find investment managers within equity styles who consistently add value relative to the S&P 500 and the appropriate style benchmark. Finally, there is no evidence that the number of funds outperforming that appropriate style benchmark index (after fees) exceeds random chance. Including non-survivors and applying selected control variables does not affect the basic results.

Cross-Subsidization in Institutional Asset Management Firms

We identify strong and robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers. The extent of strategic performance allocation varies with the product’s client power. Strategic performance allocation is particularly pronounced for young products. Studying variation in opportunities for strategic performance allocation (illiquidity of the products’ investment styles and cross-trading status of the firm) enables us to show that (at least part of) strategic performance allocation rests upon cross-subsidization. We also quantify, and assess the implications of, strategic performance allocation away from the products that likely cross-subsidize this performance. * We thank Vikas Agarwal, Stephen Dimmock, Mark Grinblatt, Umit Gurun, Jung Hoon Lee, Joshua Pollet, Jeffrey Pontiff, Veronika Pool, Mark Seasholes, Merih Sevilir, Clemens Sialm, Andrei Simonov, and Scott Yonker for comments and suggestions. Our gratitude goes to the 2012 Finance from Down Under conference participants, especially Neal Galpin (the discussant). We also thank seminar participants at Hong Kong University, Indiana University, Massey University Albany Campus, Massey University Palmerston North Campus, Nanyang Technological University, National University of Singapore, and Victoria University for their suggestions.We identify strong and robust evidence of strategic performance allocation in the institutional money management industry, directed toward strong recent performers. The extent of strategic performance allocation varies with the product’s client power. Strategic performance allocation is particularly pronounced for young products. Studying variation in opportunities for strategic performance allocation (illiquidity of the products’ investment styles and cross-trading status of the firm) enables us to show that (at least part of) strategic performance allocation rests upon cross-subsidization. We also quantify, and assess the implications of, strategic performance allocation away from the products that likely cross-subsidize this performance.

The Performance of Short-term Institutional Trades

Using a proprietary database of institutional money manager and pension fund transactions, we find wide dispersion in trade holding periods. For example, all of the institutional funds execute roundtrip trades lasting over a year, and 96% of them also execute trades lasting less than one month. In aggregate over seven percent of volume occurs in trades that are held for less than one month, although short-duration trades have negative returns on average. Our empirical results show mixed support for the idea that institutions make trade holding period decisions based on portfolio optimization, some evidence of persistent information or trading skill in short-duration trades, and no evidence that short-duration institutional trades are driven by the disposition effect or overconfidence. Our results are consistent with the agency problem that arises when clients cannot distinguish when a manager is “actively doing nothing” versus “simply doing nothing.”

A Tangled Tale of Training and Talent: PhDs in Institutional Asset Management

Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading economics and finance journals further enhance the performance gap.Several hundred individuals who hold a Ph.D. in finance, economics, or a variety of others fields work for institutional money management companies. The gross performance of investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for matched non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading finance and economics journals accentuate many of these differences. In the context of money management, we evaluate whether a Ph.D. is a positive signal of managerial skill. The capability to identify money managers who will be successful is important in both academic and practical settings. We start from the premise that substantial effort and knowledge acquisition is necessary to complete the advanced coursework and unique research required to obtain a Ph.D. Thus, individuals holding these degrees will have unusual characteristics relative to the baseline population. We extend this logic to the production of papers published in leading economics and finance journals. Therefore, substantial academic publications in this arena could play an additional role beyond the simple possession of a Ph.D. degree. Of course, for individuals holding a Ph.D. to make a substantial difference in product performance, they must be placed in key roles within the management company. It is possible that a Ph.D. program serves as a screening device for individuals with innate intelligence following Spence (1973). Alternatively, specialized human capital developed during a Ph.D. program might be particularly useful for various tasks related to money management as in Becker (1964, 1993). Nevertheless, it is also possible that these degrees are largely useless outside an academic environment. In spite of the latter possibility, hundreds of individuals holding this advanced degree are employed by institutional money management companies in our sample. Is this employment pattern driven by a random distribution of advanced degrees amongst money managers, or does it have an explanation rooted in some form of selection? The possibility that education is linked to managerial talent in the context of money management has been explored by the existing literature. For instance,