Two academics from the Rotterdam School of Management, Erasmus University, and a portfolio manager in Amsterdam were named co-winners of the $30,000 grand prize of the Standard & Poor's SPIVA Awards recognizing excellence in research in innovative applications of financial market indexes in investment management.
Hao Jiang, assistant professor of finance, Marno Verbeek professor of finance, and Yu Wang, portfolio manager and researcher at the Quantitative Indicator Fund of IMC Asset Management BV, will share the prize — named for the S&P index vs. active performance measurement methodology — for their research paper, “Information Content when Mutual Funds Deviate from Benchmarks.”
Jens Dick-Nielsen, research fellow in the department of finance, Copenhagen Business School, Frederiksberg, Denmark, was named winner of the $15,000 second-place award for his paper on the unintended consequences of the Dodd-Frank Act and other tighter regulations on the bond market, which have hurt investors by raising transaction costs and making it less efficient.
In their paper, the three winning co-authors wrote, “Despite the consensus view that active mutual funds on average fail to outperform passive benchmarks, we find a high investment value of the consensus wisdom of active mutual funds.
“In particular, stocks that are heavily overweighted by active funds relative to their benchmark indexes perform substantially better than their underweighted counterparts.
“This outperformance is greater in stocks with more firm-specific information, as well as in those with fewer active mutual funds that compete for private information. The large premium dissipates quickly as the consensus view becomes publicly available. The results thus are consistent with the notion that informed investing by active mutual funds enhances the informativeness of stock prices.”
“Economists have long been puzzled by the rapid expansion of the actively managed mutual fund industry and the seemingly futile attempts of active mutual funds to outperform passive benchmarks,” the three wrote in their paper. “Applying a lens that separates active and passive portions of individual fund portfolios, we find that the consensus wisdom of active mutual funds has a high investment value, and most active funds combine their active and passive portfolios, such that on average it is difficult to identify abnormal performance by the total fund portfolios. These results suggest that inferences about managerial skill or market efficiency based on evidence from the mutual fund alphas may be misleading.”
Messrs. Jiang, Verbeek and Wang couldn't be reached for comment.
Mr. Dick-Nielsen in his paper “Dealer Inventory and the Cost of Immediacy” provides an example of the side effects of regulation. “To comply with the new regulations, the dealers have to reduce inventory, which in theory would lead to an increase in the cost of trade executions, and a reduction in market efficiency,” according to an S&P statement about the awards. “This theory is tested and confirmed.”
Their papers are available free at the SPIVA website.
S&P will present the winners with their awards at a ceremony March 20 in New York, said spokesman David R. Guarino.
The panel of judges for the awards consisted of David M. Blitzer, managing director and chairman of the index committee, S&P; Frank Luo, senior director, index research and design, S&P Dow Jones Indices; Antti Petajisto, vice president, BlackRock; Vijay Singal, the J. Gray Ferguson Chair Professor of Finance, Pamplin College of Business, Virginia Polytechnic Institute and State University; Harold Evensky, president of Evensky & Katz; Sanjiv Das, professor of finance, Leavey School of Business, Santa Clara University; and Jeffrey Wurgler, the Nomura Professor of Finance, Stern School of Business, New York University.