Strategic Interactions and Portfolio Choice in Money Management : Evidence from Colombian Pension Funds
This paper studies the portfolio choice of strategic fund managers in the presence of a peer-based underperformance penalty. Evidence is taken from the Colombian pension fund management industry, where six asset managers are in charge of portfolio...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank Group, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2014/07/19902944/strategic-interactions-portfolio-choice-money-management-evidence-colombian-pension-funds http://hdl.handle.net/10986/19382 |
| Summary: | This paper studies the portfolio choice
of strategic fund managers in the presence of a peer-based
underperformance penalty. Evidence is taken from the
Colombian pension fund management industry, where six asset
managers are in charge of portfolio allocation for the
mandatory contributions of the working population. These
managers are subject to a peer-based underperformance
penalty, known as the Minimum Return Guarantee. The trading
behavior by the managers is studied before and after a
change in the strictness of the guarantee in June 2007. The
evidence suggests that a tighter minimum return guarantee
results in more trading in the direction of peers, a
behavior that is more pronounced for underperforming
managers. These managers rebalance their portfolios by
buying securities in which they are underexposed relative to
their peers, as opposed to selling assets in which they are
overexposed. Overall, the results suggest that incentives
for managers to be close to industry benchmarks play an
important role in the portfolio allocation of these funds. |
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