John G. Gallo

Commercial bank mutual fund activities: Implications for bank risk and profitability

Abstract This paper examines the risk structure of bank holding companies and the effect of mutual fund activities on bank risk and profitability over the period 1987–1994. Findings from structural change tests indicate a significant decline in bank risk occurred near the mid-point of the study. Results from a confirmatory factor analytic model employed to examine the impact of mutual fund activities on banks suggest that mutual fund activities moderated bank industry systematic risk during the sample period. Mutual fund activities also increased the profitability of banks. These results suggest that mutual funds represent a productive avenue of expansion for bank holding companies.

Comparative measures of performance for U.S.-based international equity mutual funds

Abstract This paper compares an international two-index model to an International Arbitrage Pricing Theory (IAPT) two-factor model to evaluate the performance of 37 U.S.-based international mutual funds over the 1985–1993 period. Results from the index model confirm prior research that international funds perform as well as the market proxy. In contrast, the IAPT model implies superior investment performance by the international funds. Moreover, the two models produce different relative performance rankings. Intertemporal comparisons of the models indicate that the multifactor IAPT model better reflects the international equity return-generating process.

Expanded securities underwriting: Implications for bank risk and return

Abstract This paper investigates the effects of a Federal Reserve Board ruling in 1987 that expanded the securities underwriting ability for Citicorp, J. P. Morgan, and Bankers Trust. Results derived from a factor-analytic event study support an infrastructure proposition in which money center versus regional banks benefit the most from expansion in underwriting. Investment banks do not suffer significant loss from a market share reduction nor is there a significant wealth transfer from investment to commercial banks. Little evidence of a reduction in total risk around the event period is found.

The performance of international bond funds

Abstract This paper evaluates the performance of U.S. based international bond mutual funds over the November 1988–March 1994 period. The funds are evaluated against single- and multi-index benchmarks. Our tests indicate that the funds, in general, were unable to outperform either benchmark over the total sample period. Fund managers did, however, outperform the multi-index during the 1988–1991 subperiod. We run further tests that indicate that the multi-index model is the more appropriate model to use in evaluating international bond fund performance.

The Performance, Asset Allocation, and Investment Style of International Equity Managers

This paper evaluates the performance of 114 international equity managers over the January 1988–December 1997 period. Performance tests are conducted using Sharpe (1966) and Jensen (1968) performance methodologies. The managers are divided into mutual fund (n=54) and separately managed fund (n=60) investment management categories. Each management category is further divided by foreign and world (global) investment objectives. Three major findings are reported. First, international equity managers, on average, were unable to outperform the MSCI World market proxy during the sample period. However, world managers did perform better than their foreign counterparts. Second, geographic asset allocation and equity style allocation decisions enhanced the performance of international managers during the sample period. Third, separately managed funds outperformed mutual funds during the period studied when mutual fund returns are measured net of management fees. The apparent managed performance advantage abates, however, when mutual fund returns are adjusted to include management fees. Thus, we find no significant difference in the performance of the management categories when returns are measured gross of fees.

Differentiating CREF Performance

We examine factors underlying the differences in commingled real estate fund (CREF) performance using a sample of 65 CREFs during 1985-2002. More than half of the individual CREFs underperformed the employed benchmark. However, portfolios of CREFs performed well in both up and down markets, smaller CREFs outperformed larger CREFs, and top performing CREFs continued to outperform. Differential CREF performance appears to be attributable to property selection, rather than allocation across real estate sectors. Liquidity-constrained CREFs exhibited lower risk. CREFs with large benchmark tracking error experienced inferior performance. These findings indicate important cross-sectional differences among CREFs and diversification opportunities for pensions employing multiple CREF investment strategies. Copyright 2006 American Real Estate and Urban Economics Association

The relationship between international bond markets and international stock markets

Abstract This paper investigates interrelationships between international bond and international stock markets over the period November 1988 through December 1993. The analysis employs the Morgan Stanley Capital International World index as a proxy for international equity markets and the Salomon Brothers World Bond index as a proxy for international bond markets. Using cointegration and Granger causality methodology, the study finds that (1) bidirectional causality exists between stock market returns and bond market returns; and (2) international markets were more inefficient during the first half of the study period than during the second half.

Determinants of pension funding and asset allocation decisions

Prior research suggests that the funding and asset allocation decisions for defined benefit pension plans may be based on tax, risk, and profitability factors. Much of the previous empirical work, however, suffers from statistical problems that may produce misleading or contradictory results. We employ a confirmatory factor analytic model to address the statistical problems plaguing pension research. Various competing hypotheses are tested simultaneously. Findings indicate that firms use pensions to offset business risk.

Institutional flows and equity style diversification

This article examines the composition of style-diversified portfolios and the influence of institutional trading on style performance over the period 1979 to 2004. We employ a methodology to identify possible cointegrating relationships among four equity styles and to determine styles necessary to a well-diversified portfolio. Two seemingly dissimilar styles, large value and small growth, are cointegrated and hence, redundant diversifiers. We show an optimized three-style portfolio that omits one cointegrated style, improves performance and lowers market risk, demonstrating the importance of allocation to style diversification. We also find evidence the trading behaviour of institutional investors explains, in part, the relationship among and between the cointegrated and the independent styles.