Clemens Sialm

Defined Contribution Pension Plans: Sticky or Discerning Money?

Participants in defined contribution (DC) retirement plans rarely adjust their portfolio allocations, suggesting that their investment choices and consequent money flows are sticky and not discerning. However, participants’ inertia could be offset by DC plan sponsors, who adjust the plan’s investment options. We examine these countervailing influences on flows into U.S. mutual funds. We find that flows into funds from DC assets are more volatile and exhibit more performance sensitivity than non-DC flows, primarily due to adjustments to the investment options by the plan sponsors. Thus, DC retirement money is less sticky and more discerning than non-DC money.

Long Run Asset Allocation for Retirement Savings

The authors examine two of the most important factors in accumulating the necessary funds for retirement: asset allocation and asset location. They find that an all-bond strategy is difficult to rationalize even for the most risk-averse individuals. A portfolio mix of 40–60 percent stocks and the remainder in bonds makes sense for those who are strongly risk averse, and mildly risk-averse individuals are best off with 70–100 percent in stocks. Because pensions dominate conventional savings accounts, their use should be maximized. For people whose federal income tax rate exceeds 15 percent and who cannot place all their retirement savings in pension accounts, the authors find that holding municipal bonds in conventional accounts is better than holding corporate bonds in pension accounts. Furthermore, the typical actively managed equity mutual fund gains more from being in a pension account than in a typical bank fund.

Home Bias and Local Contagion: Evidence from Funds of Hedge Funds

This paper analyzes the geographical preferences of hedge fund investors and the implication of these preferences for hedge fund performance. We find that funds of hedge funds overweight their investments in hedge funds located in the same geographical areas and that funds of funds with a stronger local bias exhibit superior performance. However, this local bias of funds of funds adversely impacts the hedge funds by creating excess comovement and local contagion. Overall, our results suggest that while local funds of funds benefit from local performance advantages, their local bias creates market segmentation that could destabilize financial markets.

The Dow Jones Industrial Average: The Impact of Fixing its Flaws

The Dow Jones Industrial Average is a flawed index. The index uses price weights instead of conceptually superior market valuation weights. The companies included in the index are not chosen systematically and are not very representative of the U.S. market; and the index ignores returns from dividends. This article shows that alternative stock price indexes that use superior weighting methods and a more systematic inclusion criterion perform very similarly to the Dow Jones Industrial Average, but, ignoring dividends dramatically underestimates the long-run returns earned by stock market investors. If Dow Jones & Co. had included dividend returns in the DJIA when it was formed in 1928, the index would be over 250,000 today.

Tax-Efficient Asset Management: Evidence from Equity Mutual Funds

Investment taxes have a substantial impact on the performance of taxable mutual fund investors. Mutual funds can reduce the tax burdens of their shareholders by avoiding securities that are heavily taxed and by avoiding realizing capital gains that trigger higher tax burdens to the funds’ investors. Such tax avoidance strategies constrain the investment opportunities of the mutual funds and might reduce their before-tax performance. Our paper empirically investigates the costs and benefits of tax-efficient asset management based on U.S. equity mutual funds. We find that mutual funds that follow tax-efficient asset management strategies generate superior after-tax returns. Surprisingly, more tax-efficient mutual funds do not underperform other funds before taxes, indicating that the constraints imposed by tax-efficient asset management do not have significant performance consequences.

Coordinated Noise Trading: Evidence from Pension Fund Reallocations

We document a novel channel through which coordinated noise trading exerts externalities on financial markets dominated by institutional investors. We exploit a unique set of events where Chilean pension fund investors followed an influential financial advisory firm that recommended frequent switches between equity and bond funds. The recommendations, which mostly followed short-term trends, generated large and coordinated fund flows. These flows resulted in substantial price pressure and increased volatility in financial markets. Pension funds increased cash holdings as a response. Our findings suggest that giving retirement savers unconstrained reallocation opportunities may exert negative externalities on financial markets.

Taxes, Shorting, and Active Management

We examine the consequences of short selling in the context of quantitative investment strategies held by individual investors in taxable accounts. Short positions not only allow investors to benef...

The Tax Benefits of Separating Alpha from Beta

Long-only active investment strategies have an inherent flaw: Investors pay capital gains taxes on market-related gains as well as on the alpha created. By separating alpha and beta, taxes can be r...

Government Debt and Corporate Leverage: International Evidence

We investigate the impact of government debt on corporate financing decisions. We document a negative relation between government debt and corporate leverage using data on 40 countries between 1990 and 2014. This negative relation holds only for government debt that is financed domestically and is stronger for larger and more profitable firms and in countries with more developed equity markets. In order to address potential endogeneity concerns, we use an instrumental variable approach based on military spending and a quasi-natural experiment based on the introduction of the Euro currency. Our findings suggest that government debt crowds out corporate debt.