A growing body of empirical research in financial economics is concerned with the relationship between an investor's attributes and that investor's demand for various portfolio assets. An important group of investors, including public and private defined benefit pension plans, sovereign wealth funds, and endowments associated with foundations, colleges, and universities, is distinguished by very long investment horizons. Some, such as pension plans, are liability-driven investors with long-duration liabilities. Others, such as university endowments, are associated with very long-lived institutions that face the challenge of allocating resources over multiple generations of potential beneficiaries.

What are the capital market consequences of the presence of investors with very long investment horizons? Does standard investment theory capture the key tradeoffs facing these investors? The theory of intertemporal portfolio choice suggests that hedging against future deterioration in the investment opportunity set is more important for long- than for short-horizon investors. The extent to which such hedging translates into differences in asset allocation and portfolio holdings is an empirical question. An investor,s horizon also matters for the measurement of risk for a given asset category, and also potentially affects the investor's willingness to sacrifice returns for an asset's liquidity.

To spur research on both the theory and practice of long-term investing, in 2016, with the generous support of the Norwegian Finance Initiative, the NBER launched a Project on Long-Term Asset Management. The fourth annual research meeting of this project was held in Cambridge, MA, on May 9-10, 2019. The researchers presented papers on topics ranging from the changing ownership structure of equity markets, to the returns on real assets such as infrastructure investments, to the valuation of private equity investments. A keynote address was delivered by Harvard University Professor John Campbell, who discussed how introducing non-stationarity in the distribution of investment returns alters standard results on intertemporal portfolio choice as well as the selection of payout policies for long-horizon investors.


John Campbell, Harvard University and NBER

NBER LTAM 2019 John Campbell from NBER on Vimeo




Summary

Fund Tradeoffs
Author(s):
Lubos Pastor, University of Chicago and NBER
Robert Stambaugh, University of Pennsylvania and NBER
Lucian Taylor, University of Pennsylvania
Discussant(s):
Mark Grinblatt, University of California, Los Angeles and NBER
Summary:

Pastor, Stambaugh, and Taylor derive equilibrium relations among active mutual funds' key characteristics: fund size, expense ratio, turnover, and portfolio liquidity. Portfolio liquidity, a concept introduced here, depends not only on the liquidity of the portfolio's holdings but also on the portfolio's diversification. As their model predicts, funds with smaller size, higher expense ratios, and lower turnover hold less-liquid portfolios. Additional model predictions are also supported empirically: Larger funds are cheaper. Larger and cheaper funds trade less and are less active, based on their novel measure of activeness. Better-diversified funds hold less-liquid stocks; they are also larger, cheaper, and trade more.

Downloads:

In addition to the conference paper, the research was distributed as NBER Working Paper w23670, which may be a more recent version.

Valuing Private Equity Investments Strip by Strip
Author(s):
Arpit Gupta, New York University
Stijn Van Nieuwerburgh, Columbia University and NBER
Discussant(s):
Antoinette Schoar, Massachusetts Institute of Technology and NBER
Summary:

Gupta and Van Nieuwerburgh propose a new valuation method for private equity investments. First, they construct a cash-flow replicating portfolio for the private investment, using cash-flows on various listed equity and fixed income instruments. The second step values the replicating portfolio using a flexible asset pricing model that accurately prices the systematic risk in listed equity and fixed income instruments of different horizons. The method delivers a measure of the risk-adjusted profit earned on a PE investment, a time series for the expected return on PE fund categories, and a time series for the residual net asset value in a fund. The researchers apply the method to real estate, infrastructure, buyout, and venture capital funds, and find modestly positive average risk-adjusted profits with substantial cross-sectional variation, and declining expected returns in the later part of the sample.

What's Wrong with Pittsburgh? Delegated Investors and Liquidity Concentration
Author(s):
Andra Ghent, University of North Carolina at Chapel Hill
Discussant(s):
Tim Landvoigt, University of Pennsylvania and NBER
Summary:

What makes an asset institutional-quality? Ghent proposes that one reason is the existing concentration of delegated investors in a market through a liquidity channel. Consistent with this intuition, they document differences in investor composition across U.S. cities and shows that delegated investors concentrate investments in cities with higher turnover. Ghent then calibrates a search model showing how heterogeneity in liquidity preferences makes some markets more liquid even when assets have identical cash flows. The calibration indicates that commercial real estate commands an illiquidity premium of two percentage points annually relative to a perfectly liquid asset with similar credit risk.

In addition to the conference paper, the research was distributed as NBER Working Paper w25966, which may be a more recent version.

The Benchmark Inclusion Subsidy
Author(s):
Anil K Kashyap, University of Chicago and NBER
Natalia Kovrijnykh, Arizona State University
Jian Li, University of Chicago
Anna Pavlova, London Business School
Discussant(s):
David Thesmar, Massachusetts Institute of Technology and NBER
Summary:

Kashyap, Kovrijnykh, Li, and Pavlova study the impact of evaluating the performance of asset managers relative to a benchmark portfolio on firms’ investment, merger and IPO decisions. The researchers introduce asset managers into an otherwise standard asset pricing model and show that firms that are part of the benchmark are effectively subsidized by the asset managers. This “benchmark inclusion subsidy” arises because asset managers have incentives to hold some of the equity of firms in the benchmark regardless of the risk characteristics of these firms. Contrary to what is usually taught in corporate finance, they show that the value of an investment project is not governed solely by its own cash-flow risk. Instead, because of the benchmark inclusion subsidy, a firm inside the benchmark would accept some projects that an identical one outside the benchmark would decline. The two types of firms’ incentives to undertake mergers or spinoffs also differ and the presence of the subsidy can alter a decision to take a firm public. Kashyap, Kovrijnykh, Li, and Pavlova show that the higher the cash-flow risk of an investment, the larger the benchmark inclusion subsidy; the subsidy is zero for safe projects. Benchmarking also leads fundamental firm-level cash-flow correlations to rise. The researchers review a host of empirical evidence that is consistent with the implications of the model.

Downloads:
The Subsidy to Infrastructure as an Asset Class
Author(s):
Aleksandar Andonov, University of Amsterdam
Roman Kräussl, University of Luxembourg
Joshua Rauh, Stanford University and NBER
Discussant(s):
Marcin Kacperczyk, Imperial College London
Summary:

Andonov, Kräussl, and Rauh investigate the characteristics of infrastructure as an asset class from the perspective of a limited partner. The stream of cash flows and riskiness of performance delivered by private infrastructure funds to institutional investors is very similar to that delivered by other types of private equity, as reflected by the frequency and amounts of net cash flows as well as by the volatility of performance measures. Public investors, such as public pension funds, government agencies, and sovereign wealth funds perform worse than private institutional investors in their infrastructure fund investments, although they are exposed to underlying deals with very similar project stage, concession terms, ownership structure, industry, and geographical location. By selecting funds that invest in projects with poor financial performance, public investors have created an implicit subsidy to infrastructure as an asset class, which Andonov, Kräussl, and Rauh estimate at a minimum of $1.3-$1.5 billion per year if the alternative opportunity is the S&P 500 or real estate funds, $3.3 billion per year if compared to listed infrastructure funds, and $8.5 billion per year if compared to private equity buyout funds. The public subsidy is not primarily driven by local investments.

Which Investors Matter for Global Equity Valuations and Expected Returns?
Author(s):
Ralph S. Koijen, University of Chicago and NBER
Robert Richmond, New York University
Motohiro Yogo, Princeton University and NBER
Discussant(s):
Tarek Alexander Hassan, Boston University and NBER
Summary:

It is common practice to decompose levels and variation in prices into expected future returns and fundamentals. However, it is unclear what information investors use for prices to be informative and how important different investors are for incorporating information into prices. Koijen, Richmond, and Yogo show that a small set of characteristics explains the majority of the variation in a panel of firm-level valuation ratios across countries. To measure how investors' demands respond to the characteristics and prices, they estimate a demand system in Great Britain and in the United States. The demand system allows the researchers to quantify the importance of different institutional types (e.g., mutual funds, broker dealers, ...) in the price formation process by computing counterfactual prices if a particular type were to follow a passive market indexing strategy.

Downloads:
The Impact of Pensions and Insurance on Global Yield Curves
Author(s):
Robin Greenwood, Harvard University and NBER
Annette Vissing-Jorgensen, University of California, Berkeley and NBER
Discussant(s):
Adrien Verdelhan, Massachusetts Institute of Technology and NBER
Summary:

Greenwood and Vissing-Jorgensen document a strong effect of pension and insurance company (P&I) assets on the long end of the yield curve. Using data from 26 countries, the yield spread between 30-year and 10-year government bond yields is negatively related to the ratio of pension assets (in funded and private pension and life insurance arrangements) to GDP, suggesting that preferred-habitat demand by the P&I sector for long-dated assets drives the long end of the yield curve. The researchers draw on changes in regulations in several European countries between 2008 and 2013 to provide well-identified evidence on the effect of the P&I sector on yields and to show that P&I demand is in part driven by hedging linked to the regulatory discount curve. When regulators reduce the dependence of the regulatory discount curve on a particular security, P&I demand for the security falls and its yield increases. These effects extend beyond long government bonds. Greenwood and Vissing-Jorgensen's results suggest that pension discount rules can have a destabilizing impact on bond markets that reverses once rules are changed.

Downloads:
Conditional Dynamics and the Multi-Horizon Risk-Return Trade-off
Author(s):
Mikhail Chernov, University of California, Los Angeles and NBER
Lars Lochstoer, University of California at Los Angeles
Stig Lundeby, Norwegian School of Economics
Discussant(s):
Christopher Polk, London School of Economics
Summary:

Chernov, Lochstoer, and Lundeby propose testing asset-pricing models using multi-horizon returns (MHR). MHR serve as powerful source of conditional information that is economically important and not data-mined. The researchers apply MHR-based testing to linear factor models. These models seek to construct the unconditionally mean-variance efficient portfolio. They reject many popular models that deliver high maximum Sharpe ratios in a single-horizon setting. Model misspecification manifests itself in strong intertemporal dynamics of the factor loadings in the SDF representation.

Downloads:
Common Ownership in America: 1980-2017
Author(s):
Matthew Backus, Columbia University and NBER
Christopher Conlon, New York University
Michael Sinkinson, Yale University and NBER
Discussant(s):
David Scharfstein, Harvard University and NBER
Summary:

When competing firms possess overlapping sets of investors, maximizing shareholder value may provide incentives that distort competitive behavior, affecting pricing, entry, contracting, and virtually all strategic interactions among firms. Backus, Conlon, and Sinkinson propose an approach to the measurement of this phenomenon for the universe of S&P 500 firms between 1980 and 2017. Over this period, the incentives implied by the common ownership hypothesis have grown dramatically. Contrary to popular intuition, this is not primarily associated with the rise of BlackRock, Vanguard, and State Street: instead, the trend in the time series is driven by a broader rise in diversified investment strategies, of which these firms are only the most recent incarnation. In the cross section, there is substantial variation that can be traced, both in the theory and the data, to observable firm characteristics - particularly the share of the firm held by retail investors. Finally, the researchers show how common ownership can theoretically give rise to incentives for expropriation of undiversified shareholders via tunneling, even in the Berle and Means (1932) world of the “widely held firm.”

In addition to the conference paper, the research was distributed as NBER Working Paper w25454, which may be a more recent version.

The Externality of Taxing the ‘Rich’: Evidence from Hedge Funds
Author(s):
Vikas Agarwal, Georgia State University
Gary Chen, University of Illinois at Chicago
Zhen Shi, Georgia State University
Bin Wang, Marquette University
Summary:

This study examines whether increases in the personal income tax rate disincentivize hedge fund managers to exert effort. Using plausible exogenous variation in federal and state statutory tax rates, Agarwal, Chen, Shi, and Wang find that fund managers' marginal income tax rate is negatively associated with fund performance. The results are similar when they analyze the effect of a major U.S. federal income tax increase in 2013 and use non-U.S. fund managers as a control group. In response to a tax hike, fund managers hold stocks with lower information asymmetry. Finally, Agarwal, Chen, Shi, and Wang find that greater incentive fees are used to mitigate tax-induced effort shirking. Their study sheds light on the externality of taxing the affluent and informs the debate on tax system design.

Downloads:

Participants

Below is a list of conference attendees.
Canyao Liu, Yale University
Egor Matveyev, Massachusetts Institute of Technology
Sjoerd Timmermans, Norges Bank Investment Management
Vegard Vik, Norges Bank Investment Management
Fredrik Willumsen, Norges Bank Investment Management
Shiyu Zhao, Boston College

More from NBER

In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals — the NBER Reporter, the NBER Digest, the Bulletin on Retirement and Disability, and the Bulletin on Health — as well as online conference reports, video lectures, and interviews.

Economics of Digitization Figure 1
  • Article
The NBER Economics of Digitization Project, established in 2010 with support from the Alfred P. Sloan Foundation,...
claudiagoldinpromoimagelecture.png
  • Lecture
Claudia Goldin, the Henry Lee Professor of Economics at Harvard University and a past president of the American...
2020 Methods Lecture Promo Image
  • Lecture
The extent to which individual responses to household surveys are protected from discovery by outside parties depends...