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It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) plans

December 11, 2014 Comments off

It Pays to Set the Menu: Mutual Fund Investment Options in 401(k) plans (PDF)
Source: Federal Reserve Board

This paper investigates whether mutual fund families acting as service providers in 401(k) plans display favoritism toward their own funds. Using a hand-collected dataset on retirement investment options, we show that poorly-performing funds are less likely to be removed from and more likely to be added to a 401(k) menu if they are affiliated with the plan trustee. We find no evidence that plan participants undo this affiliation bias through their investment choices. Finally, the subsequent performance of poorly-performing affiliated funds indicates that these trustee decisions are not information driven.

EU — World trends in R&D private investment. Facts and figures

December 11, 2014 Comments off

World trends in R&D private investment. Facts and figures
Source: European Commission

The European Commission published today its 2014 EU Industrial R&D Investment Scoreboard. The Scoreboard is based on a sample of 2500 companies, the world’s top investors in Research and Development (R&D) and equivalent to about 90% of the total expenditure on R&D by businesses worldwide. Top world R&D investors continued to increase their R&D investments by 4.9% in 2013, a figure well above their net sales growth (2.7%). The 633 EU companies among the top world R&D investors increased R&D investment by 2.6% while showing a decrease in sales (-1.9%) and operating profits (-6.6%).

Identifying Speculative Bubbles: A Two-Pillar Surveillance Framework

December 10, 2014 Comments off

Identifying Speculative Bubbles: A Two-Pillar Surveillance Framework
Source: International Monetary Fund

In the aftermath of the global financial crisis, the issue of how best to identify speculative asset bubbles (in real-time) remains in flux. This owes to the difficulty of disentangling irrational investor exuberance from the rational response to lower risk based on price behavior alone. In response, I introduce a two-pillar (price and quantity) approach for financial market surveillance. The intuition is straightforward: while asset pricing models comprise a valuable component of the surveillance toolkit, risk taking behavior, and financial vulnerabilities more generally, can also be reflected in subtler, non-price terms. The framework appears to capture stylized facts of asset booms and busts—some of the largest in history have been associated with below average risk premia (captured by the ‘pricing pillar’) and unusually elevated patterns of issuance, trading volumes, fund flows, and survey-based return projections (reflected in the ‘quantities pillar’). Based on a comparison to past boom-bust episodes, the approach is signaling mounting vulnerabilities in risky U.S. credit markets. Policy makers and regulators should be attune to any further deterioration in issuance quality, and where possible, take steps to ensure the post-crisis financial infrastructure is braced to accommodate a re-pricing in credit risk.

Impact Investing: A Primer for Family Offices

December 5, 2014 Comments off

Impact Investing: A Primer for Family Offices
Source: World Economic Forum

Impact investing enables high net worth individuals to be explicit about their shared values and to reflect them in their investment and wealth management decisions. In addition, an impact investing strategy aligned with family values can help to engage a younger generation in the leadership and management of a family office.

Family offices act as responsible stewards of the wealth of high-net-worth and ultra-high-net-worth individuals, their families and their heirs. Yet after wealth is generated by one generation of a family, an estimated 60% lose that wealth by the end of second generation, and a staggering 90% by the end of third. Many multi-generational family offices are now exploring whether impact investing is a way to unite families around values and positive legacies, thereby more closely involving family members in responsible long-term investing.

While impact investing may not suit all family offices, for those that choose to become involved, there is a shortage of expertise, tools and frameworks to enable engagement. As a result, despite growing interest, many struggle with the initial steps of engagement. One of the main goals of this primer is to help family offices interested in impact investing to begin to understand how they can put it into practice. It offers useful frameworks and insights for multi-family offices, family businesses, family foundations and high-net-worth individuals as well as policy-makers and advisers.

U.S. Senate Permanent Subcommittee on Investigations — Subcommittee finds Wall Street commodities actions add risk to economy, businesses, consumers

November 25, 2014 Comments off

Subcommittee finds Wall Street commodities actions add risk to economy, businesses, consumers
Source: U.S. Senate Permanent Subcommittee on Investigations

Wall Street banks have become heavily involved with physical commodities markets, increasing risks to financial stability, industry, consumers and markets, a two-year investigation by the Senate Permanent Subcommittee on Investigations has found.

The investigation’s findings, contained in a 396-page bipartisan report, add important new details to the public debate about the breakdown of the traditional barrier between commercial activities and banking. Included are previously unknown details about activities by Morgan Stanley, JPMorgan Chase and Goldman Sachs, including Goldman Sachs’ controversial management of warehouses storing most of the warranted aluminum in the United States. The new details raise new questions about whether such activities harm businesses and consumers and allow for possible manipulation of the markets.

See also:
Wall Street Bank Involvement With Physical Commodities (Day One)
Wall Street Bank Involvement With Physical Commodities (Day Two)

Losing the Future: The Decline of U.S. Saving and Investment

November 21, 2014 Comments off

Losing the Future: The Decline of U.S. Saving and Investment
Source: Tax Foundation

Key Findings

  • Saving and investment are necessary for a society to adequately provide for its future.
  • Saving and investment have declined substantially as a percentage of GDP over the last 40 years, and have collapsed almost entirely since the financial crisis.
  • American private saving barely keeps pace with total government deficits. On the whole, the country saves very little.
  • American investment barely keeps pace with depreciation; U.S. private and public capital stock and infrastructure deteriorates almost as quickly as it can be repaired or replaced with new investment.
  • The U.S., overall, does not save enough money to fund all of the worthwhile domestic investments and relies substantially on foreign investors to make up the difference.
  • Tax reform could help the U.S. become a forward-looking economy that invests and saves at more prudent rates.

How the SEC Helps Speedy Traders

November 13, 2014 Comments off

How the SEC Helps Speedy Traders
Source: Social Science Research Network

We show that the Securities and Exchange Commission’s system for disseminating market-moving information in securities filings gives some investors an advantage over others. We describe two systems — the SEC’s file transfer protocol (FTP) server and public dissemination service (PDS) — that give certain investors access to securities filings before the general public. While contemporaneous work on this issue is limited to insider filings, we show that both the FTP and PDS gaps are pervasive across all types of filings, including Form 8-K, which includes market-moving information such as corporate earnings. We show that FTP access gives investors a mean (median) 85 (11)-second lead time, and PDS gives investors a mean (median) 77 (10)-second lead time, before the filing is available on the SEC’s website.

We also provide evidence suggesting that investors had the opportunity to take advantage of this lead time to earn trading profits. In particular, we show that traders could earn economically and statistically significant returns by trading on either the FTP or PDS gaps. Moreover, even investors who waited as long as ninety seconds to execute trades on the FTP or PDS gaps could earn meaningful returns using this strategy. We also identify abnormal trading volume in the moments after PDS subscribers receive SEC filings.

Finally, our direct access to both FTP and PDS also allow us to document the changes to those systems that the SEC implemented after the public revelation of this issue in October 2014. We show that the SEC imposed a significant delay on the PDS service after the existence of the informational advantage was revealed. We also, however, show that, as of November 2014, PDS subscribers still receive some 37% of filings before the general public. We argue that lawmakers should consider reforms that would help the SEC develop a centralized information-dissemination system that is better suited for the high-speed dynamics of modern markets.

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