- Why is there so much side-by-side management in the ETF industry?
(joint with M. Luo).
We document the dramatic rise of side-by-side management (“SbS”) in the global ETF industry. As of 2018, around 60% of individual ETF fund managers manage mutual funds in a SbS arrangement, most of which are “active” mutual funds. We argue that mutual fund firms employ SbS arrangements to exploit institutional client relationships of their mutual fund managers to help channel mutual fund TNA at risk of withdrawal to the firms’ new ETF business. Mutual fund managers are most likely to become SbS ETF managers if they generate revenue from institutional TNA and face strong ETF competition. SbS initiations lead to discretionary institutional (but not retail) outflows from mutual funds and contemporaneous inflows in the ETFs overseen by those same SbS managers. Client level holdings tests link these flows to those institutional clients with likely stronger relationship to the SbS managers, suggesting that SbS arrangements are an important tool for traditional mutual fund firms to meet and manage the rise of ETFs.
We highlight an important but overlooked characteristic of financial fragility: “fragile” stocks are more liquid because they are sensitive to non-fundamental liquidity shocks. This makes them less sensitive to corporate actions with price impact and therefore affects firms’ incentives to engage in those actions. We show that fragile firms have lower share repurchases but invest more, the effects stronger for financially constrained firms. We establish causality by relying on exogenous changes in fragility induced by mergers of asset managers with portfolio overlap in the stocks. Our results suggest that financial fragility has direct but unexpected real implications for corporate actions.
Using global mutual fund and ADR data, we test if funds strategically trade cross-listed firms’ equity in the most liquid location – the United States or the domestic market. Funds that show such liquidity picking behaviour outperform those that do not. This result is robust to various performance tests, driven by superior stock-picking ability of both cross-listed and non-cross-listed stocks, and stronger for high active share funds. Liquidity picking mitigates funds’ capacity constraints and creates $41.7 million in value-added for funds in the top tertile. Our tests provide direct evidence in favour of theories of informed trading in a multi-market setting.
Why do so few mutual fund families launch so many funds and styles around the World? We posit that launching numerous funds on an increasingly granular style grid allows incumbent families to congest the product space and deter market entry. Key to this argument is the persistently low dimensionality of the mutual fund product space, which we establish by analyzing the names of over 40,000 equity funds sold in 91 countries between 1931 and 2015. Over time, the strategy of filling up the style grid has led to the dominance of few families offering large, granular, and similar fund menus.
We use mergers in the global asset management industry to study the returns to scale from labor specialization. Mergers are followed by an increase in managerial turnover that assigns fund managers to more specialized tasks. This leads to increased specialization and product differentiation, creating an incremental $60 million of value added per merger per year on average. Such value creation is concentrated in "mergers of equals" that lead to the largest increases in firm size. Our results provide direct and quantifiable evidence on the value of the firm's role in assigning employees to tasks.
This paper received media coverage from 929
- Contagion and Decoupling in Intermediated Financial Markets
I analyze the interplay between fundamental and intermediation risk in a multi-asset dynamic general equilibrium model with heterogeneous agents. Agents differ in their level of direct access to investment opportunities. Intermediation relationships are formed to overcome limited market access. Intermediation risk is captured via frictions in the relationships between agents that introduce fragility into asset prices. Asset prices are fragile when they have a concentrated investor base making them dependent on the fortunes of a few investors. In contrast, a non-concentrated investor base makes asset prices resilient with respect to intermediation risk. But not all assets with a concentrated investor base are fragile. I identify fundamental characteristics that induce resilience in assets with a common concentrated investor base. These characteristics lead to portfolio rebalancing within the common investor base that makes some assets resilient and renders others fragile in the presence of intermediation risk. Likewise, in a multi-asset framework, assets that are resilient due to a broad investor base are not completely immune to the fragility experienced by other assets. In a dynamic context, fragile assets tend to experience contagion whereas resilient assets tend to decouple whenever the intermediation frictions are severe. I argue that an understanding of the dynamic behavior of asset prices requires an understanding of fundamental and intermediation risk as well as the interaction between the two.