International Finance, Delegated Portfolio Management, Asset Pricing, Portfolio Choice    

Abstract: I analyze foreign portfolio decisions and performance of international mutual funds. In their foreign portfolios, funds overweight and concentrate in industries that are large in their home country. On the country level, they underweight countries with a different industry structure relative to home. This Foreign Industry Bias is concentrated in funds with a classical Home Bias. For those funds, Foreign Industry Bias is associated with superior performance and foreign stock picking is a significant contributor to that performance. Their foreign trades co-move with current home country and global industry returns and subsequently predict foreign stock returns. Both portfolio characteristics and performance are persistent at the one year horizon. Taken as a whole, the evidence supports the view that some funds successfully use domestically-rooted industry information when investing abroad and suggests that domestic industry structures proxy for the relative informational advantage enjoyed by different foreign investors.

Abstract: 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.

Abstract: We study international subcontracting in the asset management industry. We document that in companies that manage both funds on behalf of other companies (outsourced funds) and own funds (inhouse funds), the inhouse funds outperform outsourced by 1.14% annually or by 50%-75% of their expense ratio. We explain this difference in performance as outsourced funds subsidizing inhouse funds. We justify it as an implicit form of incentive-based compensation accepted by the contractor management company that incentivizes the subcontractor to deliver higher performance on the managed funds. As contract theory posits, we find that subsidization makes the subcontractor deliver higher performance; subsidization is lower the more difficult it is for the principal to observe the agent - i.e., the fund family and the management company are located in different countries -; subsidization is negatively related to the degree of exclusivity in the family-subcontractor relationship; subsidization is positively related to the bargaining power of the management company - i.e., its ability to independently market and distribute its funds to investors. All these results are consistent with an equilibrium view in which subsidization is a part of the incentive compensation of the agent.