Essays on the performance and trading strategies of institutional investors

Abstract

This thesis consists of three stand-alone studies relating to the performance and trading strategies of institutional investors. The first study examines information sharing among delegated portfolio managers through networks connected by investment mandates between plan sponsors and their sub-advisers. Specifically, this study identifies similarity in returns, holdings and trading between mutual funds operated by sub-advisers, and tests whether such similarity is stronger when two funds share a mandate network. The empirical results provide evidence consistent with information sharing among these delegated portfolio managers. A mutual fund on average shares more similar returns, holdings and trading with funds in sub-advisory mandate networks than with funds outside the networks. Preliminary evidence suggests that information about both general investment styles and individual firms is transferred within mandate networks. The second study investigates to what extent institutional investors engage in socially responsible investing by examining the trading behavior of a large group of institutional investors on four emerging market stocks targeted by the Sudan divestment campaign from 2001 to 2012. The empirical results provide evidence of a negative relationship between the intensity of the campaign and the institutional ownership breadth of the stocks. However, selling by institutional investors is only observed in the U.S., the original home of the campaign. Further, higher campaign intensity is associated with depressed stock prices and thus higher future returns. In summary, the evidence is consistent with institutional investors engaging in socially responsible investing, and supports the effectiveness of the stock boycott. The third study examines the attribution of mutual fund performance between fund companies and individual fund managers. Specifically, this study explores the relative importance of the personal skills of the fund manager compared with the supporting personnel and resources of the fund company in determining a fund’s performance outcomes. The empirical results suggest that manager fixed effects play a more significant role than fund, firm or advisor fixed effects in explaining the variations in fund performance. Further, manager skills appear to dominate fund performance, especially in sole-managed funds. When a fund replaces its manager, the fund’s performance after the manager replacement is positively and significantly correlated with the manager’s past performance at other funds, rather than the fund’s past performance with the previous manager. However, there is only modest evidence that manager skills are appreciated by investors. Taken together, the evidence is consistent with fund managers being more important than fund companies for fund performance.