Fiduciary Finance GOLD PAGINATION (M2429).indd i 15/11/10 15:25:30 For Lily and Claudia GOLD PAGINATION (M2429).indd ii 15/11/10 15:25:30 Fiduciary Finance Investment Funds and the Crisis in Financial Markets Martin Gold Sydney Business School, University of Wollongong, Australia Edward Elgar Cheltenham, UK • Northampton, MA, USA GOLD PAGINATION (M2429).indd iii 15/11/10 15:25:30 © Martin Gold 2010 All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc William Pratt House Dewey Court Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Control Number: 2010927659 ISBN 978 84844 895 03 Typeset by Servis Filmsetting Ltd, Stockport, Cheshire Printed and bound by MPG Books Group, UK GOLD PAGINATION (M2429).indd iv 15/11/10 15:25:30 Contents List of figures List of tables List of boxes Preface List of abbreviations PART I vi vii viii ix x INSTITUTIONAL INVESTMENT AND THE INDUSTRIAL ORGANIZATION OF FIDUCIARY FINANCE An introduction to fiduciary finance The investment business Investment in its institutional setting PART II 26 41 THE INTELLECTUAL UNDERPINNINGS OF INSTITUTIONAL INVESTMENT The science of investment The active versus passive debate PART III 63 83 FIDUCIARY FINANCE AND THE STABILITY OF FINANCIAL MARKETS The gatekeepers of fiduciary finance The rise of sovereign wealth funds Sustainable investment strategies and fiduciary activism Future financial crises: what role for investment funds? 103 122 136 151 Appendix: a mathematical analysis of fund manager performance References Index 165 168 183 v GOLD PAGINATION (M2429).indd v 15/11/10 15:25:30 Figures 1.1 Fiduciary product flows and financial market transactions 1.2 Functional separation of the financial fiduciary and its products 1.3 Innovation and evolution of fiduciary products 1.4 Global fiduciary finance system assets 1.5 Capital market and financial aggregates 2.1 The fiduciary finance business model 2.2 A simplified fiduciary finance ‘value chain’ 2.3 The risk–return continuum of fiduciary products 3.1 Sample statement of investment policy 3.2 A comparison between full market value and investable capitalization 3.3 Free-float discounts applied to leading global stocks 5.1 A schematic overview of fund manager performance evaluation 6.1 Modes of gatekeeper advice and pension portfolio funding flows 6.2 The traditional gatekeeping role of investment consultants 6.3 Fund manager–gatekeeper dependencies (all asset classes) 6.4 Fund manager–gatekeeper dependencies (Australian equities) 7.1 Global distribution of SWF assets 9.1 A schematic of security pricing in supposed equilibrium 13 13 16 17 27 29 34 52 55 56 90 105 107 118 120 124 152 vi GOLD PAGINATION (M2429).indd vi 15/11/10 15:25:31 Tables 1.1 1.2 2.1 2.2 4.1 6.1 6.2 6.3 6.4 6.5 7.1 7.2 9.1 Financial products, promises and prudential regulation Investor risk and protection measures Industrial organization of Japanese asset management Selected industry mergers and acquisitions in Australia Paradigms of investment theory Changing modes of gatekeeper advice and influence Descriptive statistics for Australian pension fund mandates Investment mandate churn for Australian pension funds Gatekeeper influence and mandate churn (all asset classes) Gatekeeper influence and mandate churn (Australian equities) The SWF universe Future Fund portfolio benchmark and exposures Disaggregation of market participants and their investment prerogatives 11 33 38 80 109 114 116 117 119 125 128 154 vii GOLD PAGINATION (M2429).indd vii 15/11/10 15:25:31 Boxes 1.1 2.1 6.1 7.1 8.1 Protecting investors: capital adequacy in the funds management context A snapshot of Japan’s mutual funds market Implemented consulting – a new market development Australia’s Future Fund Sustainability indices 11 32 104 127 146 viii GOLD PAGINATION (M2429).indd viii 15/11/10 15:25:31 Preface This book provides an exposition of contemporary investment theory and financial markets focusing upon the workings of the fiduciary finance industry Through its various institutional forms (including pension funds, mutual funds, hedge funds and sovereign funds), this industry aggregates investment capital from individuals, corporations and governments and intermediates between these investors and capital markets The value of fiduciary assets eclipses the world’s economic output and is an important source of risk capital and liquidity for the global financial system Until quite recently, the economic stature of fiduciary finance and its role in the global financial system received limited scrutiny from academics, financial system governors and regulators In the aftermath of the recent financial crisis, however, fiduciary institutions such as pension funds and other collective investment vehicles have been recognized as being members of the ‘shadow banking system’ which are systemically interconnected to traditional financial institutions and the real economy As episodes of financial market volatility have become more frequent and displayed increasing amplitude over the past two decades, calls have been made for reforms to mitigate the excesses within the global financial system The scientific status (and thus, legitimacy) of the investment industry has also been queried Market outcomes, however, have largely been observed through a restricted lens of orthodox finance theory with traditional financial institutions (such as banks and insurers) predominating However, the business model and economic rationale of the fiduciary finance industry is clearly differentiated and its investing practices remain subject to prudential constraints and business disciplines To provide a better understanding of the outcomes from financial markets and to evaluate whether regulation can create meaningful change, this book explores the extant theories of investment and industry practices The research presented in this monograph is therefore of interest to investors, academic and industry researchers, regulators and taxpayers ix GOLD PAGINATION (M2429).indd ix 15/11/10 15:25:31 Abbreviations ALM APM ASIC ASX APRA BCBS BIS CAPM CDO CDS CPI EBITDA ECB ECN EMH ESG ETF FSB FUA FUM IFC IFSL IMF IOSCO IWG NAV OECD OMC RBA REIT SEC SRI SSRN SWF asset-liability management arbitrage pricing model Australian Securities and Investments Commission Australian Securities Exchange Australian Prudential Regulation Authority Basel Committee on Banking Supervision Bank for International Settlements capital asset pricing model collateralized debt obligations credit default swaps consumer price index earnings before tax, depreciation and amortization European Central Bank electronic crossing network efficient markets hypothesis environmental, social and governance exchange-traded fund Financial Stability Board funds under advice/administration funds under management International Finance Corporation International Financial Services London International Monetary Fund International Organization of Securities Commissions International Working Group of Sovereign Wealth Funds net asset value Organisation for Economic Co-operation and Development ongoing management cost Reserve Bank of Australia real estate investment trust US Securities and Exchange Commission socially responsible investment Social Science Research Network sovereign wealth fund x GOLD PAGINATION (M2429).indd x 15/11/10 15:25:31 GOLD PAGINATION (M2429).indd 182 15/11/10 15:25:38 Index Abramson, L 144 Abu Dhabi 123, 125, 134, 135 active versus passive debate 83–99 benchmark mis-specification 91 cherry picking 98 closet indexing, portfolio construction effects 93–4 critique of 88–92 decision-making skills of fund managers 85–6 and efficient markets hypothesis (EMH) 84–5, 87 funds management industry, effects on 93–4 hot hands phenomenon and performance predictions 85, 92 index constituent changes, information effect of 94 index tracking, low management costs of 87–8 indexing inertia 99 indexing strategies, development of 86–8 indexing strategies, irrational, and actively managed funds 87 indices as actively managed instruments 94 literature review 84–8 and managed fund performance, investment, science of 74–5 managed portfolios, performance evaluation of 85–6 market outperformance, possibility of 88–9 and market timing efforts 35, 59, 85, 111 performance anomalies, attributing sources of 89–92 performance management, continuous, effects of 92–3 portfolio indexation and corporate governance concerns 95–6 portfolio management and peer group benchmarks 94 portfolio performance evaluation measures, sensitivity of 91 portfolio returns and selection and survivorship biases 90–91 practical implications 92–6 prudential investment standards and active management 87 risk-adjusted performance measures 97 theoretical framework 83–4 weighting changes and performance outcomes 86, 91, 92 see investment business Algeria 125 Ali, P 13, 36, 45, 46, 59, 95, 138, 139, 141, 150, 163 Andreopoulos, S 124 Arnott, R 59, 155 Arvedlund, E 111 Australia Australian Foundation and Investment Corporation (1928) 10 consolidation activity 37 fiduciary finance history and development 10, 14, 37 Future Fund 124, 125, 127–8, 134 gatekeepers of fiduciary finance see gatekeepers of fiduciary finance hedge fund failures 21, 163, 164 industry mergers and acquisitions 38–9 institutional activism and sustainable investment 141 investment management fees and charges 37 investment strategies 31 pension fund mandates statistics 114, 116 183 GOLD PAGINATION (M2429).indd 183 15/11/10 15:25:38 184 Fiduciary finance portfolio disclosure requirements 51, 52 sovereign wealth funds 124, 125, 127–8, 134 superannuation regulations 51 sustainable investment 138, 139, 141, 145, 150 Balding, C 131 banks 9–10, 17, 18, 19, 21, 157–8 Barber, B 77 Barberis, N 77 Basel Committee on Banking Supervision (BCBS) 157–8 Bauer, R 138, 144 Beck, R 130, 131, 134 Beneish, M 94 Berkowitz, M 27 Bernstein, P 53, 59, 86 Bernstein, S 130 Bhagat, S 150 Bines, H 87 Bird, R 95–6 Black, F 74, 75, 163 Blake, D 93, 110 Block, S 91 Blundell-Wignall, A 134 Bodie, Z 84 Bogle, J 85, 92 Boldin, M 87 bonds 14, 34, 46 Bortolotti, B 123, 129, 134, 135 Brazil 124 Brealey, R 94 Brennan, M 92 Brinson, G 85 Brown, K 93, 112 Brown, S 91 Brunei 125 Bührer, K 164 Burr, B 111 Busse, J 112 Camara, K 142 Canada 27, 139 Canina, L 98 capital asset pricing model (CAPM) 73–4, 75–6, 79–80, 131 Carhart, M 74, 85, 92, 98 Carleton, W 143 GOLD PAGINATION (M2429).indd 184 Chen, N 75 Chevalier, J 54, 93, 113 Chhaochharia, V 130 China 123, 124, 125, 134, 146 Chung, D 144 Cici, G 87 Clark, G 110, 111, 132 Clarke, R Clegg, B 99 Coffee, J 149 Condon, C 163 consolidation activity 37–9 Cummins, C 135 Cutler, D 78 Daniel, K 77, 85 Darnell, M 155 Dass, N 39 Davis, J 59 Day, S 86 De Bondt, W 77 De Long, B 78, 152 Dedman, E 142 Del Guercio, D 26, 45, 110, 113 Denis, D 94 derivatives dealers, regulation of 158 Dewenter, K 130 Dishi, E 113 Dodd, G 42, 43–4, 69–70 Dowen, R 59 Drucker, P 142 Dubai 123 E-Crossnet (EXN) crossing platform 57 Egypt 146 Ellis, C 26, 54, 85, 87 Ellison, G 54, 93, 113 Elton, E 74, 85, 87, 91, 97, 98, 106 Enderle, F 59 Ennis, R 106 environmental concerns see sustainable investment strategies and fiduciary activism, history of equity market 16–17, 34, 45, 117–19, 120, 130, 159 Europe sovereign wealth funds 123, 124, 131 sustainable investment 137–8, 144 see also individual countries 15/11/10 15:25:39 Index Faccio, M 150 Faff, R 113, 121 Fama, E 74, 75, 78, 83, 97 fees 27–9, 30, 37, 51, 53–4, 57, 104–5, 112, 158 Fernandes, N 129, 130 Fidora, M 130, 131, 134 France 125, 139 Frankfurter, G 63, 66 French, D 91 French, K 75, 97 Fridson, M 45 Friedman, M 66–8 Frino, A 97 fund manager performance, mathematical analysis of 165–7 future financial crises and investment fund role 151–64 and alternative trading venues 159 asset pricing influences 152 and credit default swaps (CDS) 158 derivatives dealers, regulation of 158 disaggregation of market participants and their prerogatives 153–4 and equity market short selling 159 and executive remuneration practices 158 financial market interventions 158–9 free markets and indexing 155, 156 and free-float adjustment 151–2 hedge funds 154, 157, 159, 161 and high-frequency (algo) trading strategies 159 indexing and market distortions 155, 160 investment operations in modern financial markets 151–6 marginal opinion, importance of 151–3 money market funds 160–61 regulatory responses and implications for fiduciary finance 157–61 retirement system coverage and investment governance 159–60 sovereign wealth funds 154 sustainability agendas and fiduciary capitalism 156 systemic risks, interconnectedness GOLD PAGINATION (M2429).indd 185 185 and macro-prudential regulation 157–8 Tier capital, phasing out of 158 see also investment business Gabaldon, T 43 Gallagher, D 31, 97 Gastineau, G 86, 99 gatekeepers of fiduciary finance 103–21 advice and influence, changing modes of 109 capital productivity and incentive effects of fiduciary finance industry 107–8 fiduciary obligations and potential agency conflicts 110–12 and financial platforms for new markets 105 fund manager–gatekeeper interdependencies, empirical analysis of 114–19 gatekeeper functions, structural change and product innovation 108–9 gatekeeper recommendations and fund manager selection 112–13 herding and clustering of pension fund returns 110 in-house pension funds and implemented consulting 104–5 industry background 106–9 institutional structure and industry dynamics 106–7 investment mandate churn analysis, all asset classes 115–17 investment mandate churn, new investment creation 114–15 investment mandate churn within Australian equities 117–19, 120 lead gatekeeper dependency 115–16, 117–19 literature, academic 109–13 manager selection and implemented consulting scheme 105 and market timing 35, 59, 85, 111 mutual funds industry scandals 111 new market development, implemented consulting as 104–6, 109 15/11/10 15:25:39 186 Fiduciary finance and pension fund decision-making 109–10, 113 pension fund governance 107–9 pension funds and mutual funds and management performance levels, differences between 113 pension funds and outperformance of benchmark 113 pension funds and pay-to-play schemes (fees to placement agents) 112 performance and asset flows 112–13 performance-related remuneration and implemented consulting scheme 105 platform products 109 shelf space fees 104 traditional advice and implemented advice comparisons 104, 105, 109 traditional role 106–7 see also investment business Geithner, T 18–19 Germany 20–21, 139 Gillan, S 142 Gilson, R 134 globalization 3, 15, 16–18, 71–2, 123–4, 131, 157 Goetzmann, W 74, 85, 92 Gompers, P 26, 144 Graham, B 42, 43–4, 69–70 Grinblatt, M 85–6, 98 Gruber, M 85, 87, 97, 98, 106 Guthrie, J 138 Haigh, M 36, 138 Hamilton, S 144 Hanrahan, P 59 Haskell, P 46, 47 Hawley, J 142 hedge funds 4, 16, 17, 19–21, 36, 163–4 and future financial crises 154, 157, 159, 161 Heisler, J 109, 112–13 Hendricks, D 74, 85, 92, 98 Hirschman, A 142, 143 Holanen, D 121 Hong, H 150 Hutson, E 10 GOLD PAGINATION (M2429).indd 186 Ibbotson, R 74, 85, 92 IMF, Global Financial Stability Review (GFSR) 157 Indonesia 146 institutional setting, investment in see investment in institutional setting International Working Group of Sovereign Wealth Funds (IWG) (Santiago Principles) 126 investment business 26–40 active versus passive debate see active versus passive debate balanced strategies 34, 35 ‘boutique’ funds managers 37 business model 26–8 ‘closet’ index funds 36–7 competitive pressures 29, 30, 31, 37 conservative/defensive funds 35 consolidation activity 37–9 and corporate sustainability 36 distribution fees to financial advisors 28, 29 distribution models 30–31, 37 diversified strategies 34, 35, 36 emergent trends 37–9 fund of funds 36 fund manager selection and mixing 36 funds management fee income according to asset scale 27–8, 30, 37 future financial crises see future financial crises and investment fund role gatekeepers of fiduciary finance see gatekeepers of fiduciary finance growth funds 34, 35 hedge funds 36 industry sales and distribution 28–31 institutional ownership of fund management firms 26–7 investment strategies, types of 30, 31–9 mezzanine funds 30 operating expenses, additional 28 pension funds and diversified investment strategies 33 and performance benchmarks 35 product range and investment strategies 31 15/11/10 15:25:39 Index risk management 27, 34, 36 screened and themed strategies 36–7 sector strategies 31–3, 34, 35 socially responsible investment (SRI) strategies 36–7 sovereign wealth funds see sovereign wealth funds, rise of sustainable investment strategies see sustainable investment strategies and fiduciary activism ‘value chain’ 29, 37 wholesale versus retail market segments 29–30 investment business, background 3–25 asset value of global funds management industry 15 bank assets 17, 18 capital guaranteed investment bonds 14 capital market and financial aggregates 17, 18 debt securities 17, 18 economic boom and change in financial system structure 18–19 equity markets 16, 17 evolution of fiduciary model of investing 10–15 fiduciary finance and capital markets 6–7 fiduciary finance definition 7–10 fiduciary finance, economic significance of financial crisis and reactive regulation financial innovation and economic growth functional separation of financial fiduciary and its products 13 funds management businesses, establishment of 14 global assets 16–18 global funds management 17 guaranteed investment contracts (GICs) 10–13 hedge funds 16, 17, 19–21 hedge funds and mortgage market 19–20 hedge funds, speculative activities of GOLD PAGINATION (M2429).indd 187 187 industry segments and economic stature 15–18 and institutional investors 16 investment funds and market meltdown 18–23 investment platforms 14–15 investor risk and protection measures 11–12 life insurers 10–12, 13–14 liquidity bridge between investment funds and traditional banking institutions 19 money market funds redemptions 21–3 mutual funds 16 pension fund assets 15–16 private equity funds 16, 17 and procyclical financial policies 4–5 reserves 16, 17 return promises and prudential regulation 8–9, 10 scale efficiencies and pooling of investors’ capital sovereign wealth funds (SWFs) see sovereign wealth funds (SWFs) unit-linked bonds 14 investment consultants see gatekeepers of fiduciary finance investment in institutional setting 16, 26–7, 41–60, 78, 106–7, 141–5 active investment and portfolio judgements 50–54 brokerage costs and deregulation 57 competition and generic product categories 52–3 dark pools (alternative trading venues) 57–8 E-Crossnet (EXN) crossing platform 57 and family and estate trusts 45–6 fee-for-service advisory arrangement 51 fiduciary investment standards 45–8 free-float adjustment 54–7 free-float adjustment process measurement 56–7 free-float discounts in developed markets 56 full market value and investable capitalization comparison 55–6 15/11/10 15:25:39 188 Fiduciary finance and index-tracking schemes 47–8, 49–50 investable markets and fragmentation of financial markets 54–8 investment and speculation, difference between 41–2, 43–5, 48 investment style specialization 53 and legislative constraints 51 management, active or passive 48–50 market equilibrium and pricing 43 and modern portfolio theory principle 47–8 modernization of investment standards 46 and money theories 42–3 performance monitoring 52–3 portfolio management and outperformance 49 POSIT crossing platform 57 product disclosure statement 51–2 product investing rules and commercial exigencies 50–54 product placement and financial intermediaries 51 prudent investor rule 45, 46–7 prudent investor rule, modernization of, and diversification 47–8 remuneration and competitive performance 53–4 shareholding and free-float adjustment 55 underperformance risk and market industry investment 53 and value-seeking 42–3, 48 investment, science of 63–82 active versus passive debate and managed fund performance 74–5 arbitrage pricing model (APM) 74–5 behavioral finance paradigm 76–9, 80 capital asset pricing model (CAPM) 73–4, 75–6, 79–80, 131 capital market theory 73–6 efficient markets hypothesis (EMH) 74, 75, 76, 78–9, 80 firm-foundation theory 68–9 and global financial crisis 71–2 GOLD PAGINATION (M2429).indd 188 herding amongst money managers and market volatility 78 inductive generalizations, scientific validity of 65–6 institutional ownership changes and stock returns, linkages between 78 investment theory paradigms 68–79 investment value theory 68–9, 70, 71 investor types and over-confidence 77 Markowitz’s portfolio theory 71–3, 75, 77, 79, 80 paradigmatic analysis 79–81 portfolio selection problem 71–3 positive economics, methodology of 66–8 price volatility patterns 77–8 probability, usage and limitations of 64–6, 67, 72, 81 prospect theory and risk assessment 76–7 research, doubt over practical value of 63, 67–8 risk assessment and APM 75 risk and capital asset pricing model (CAPM) 73–4, 75–6, 79–80, 131 risk minimization 72–3 and security analysis 69–70, 75, 77 theoretical development and neoclassical economics 64 value investing and intrinsic value 68–71, 79, 80 value investment and income capitalization 69–70 Ippolito, R 74, 97 Ireland 125 Italy 139 Japan 32–3, 131, 139 Jen, S 124 Jensen, M 74, 82, 85, 91, 97, 110 Kacperczyk, M 150 Kahneman, D 76–7 Karpoff, J 142 Kazakhstan 125 Keasey, K 143 Kelly, K 164 Kempf, A 144 15/11/10 15:25:39 Index Kennedy, T 145 Kern, S 124 Keynes, J 42, 65–6, 76, 82, 88 Khorana, A 39, 111 Kiribati 123 Klarman, S 82 Knill, A 129, 130–31 Knoll, M 149 Kohn, D 163 Koppes, R 95, 143 Kotter, J 129, 135 Kuhn, T 81 Kuwait 123, 125, 134 La Porta, R 77 Laeven, L 130 Lakonishok, J 77, 110, 111 Langbein, J 46, 47–8, 87 Lasfer, M 150 Ledster, D 29, 37 Lehman Brothers 18, 20, 21, 22 Lehmann, B 91 Leibowitz, M 163 Lel, U 129, 135 Levy, H 53, 59 Libya 125 Liedtke, P 24 Linden, P 145 Lintner, J 73 Lund, S 163 Lynch, A 94 MacDonald, F 134 McGoun, E 63, 66 MacQueen, G 98 Madhavan, A 57, 94 Mahoney, P 111 Malaysia 125 Malkiel, B 71, 78, 82, 84, 85, 86–7, 89, 90–91, 94, 99 Mamaysky, H 39 Mann, T 59 market timing 35, 59, 85, 111 Markowitz, H 71–3, 75, 77, 79, 80 Marsh, T 95 Massa, M 39, 93, 111 Matolcsy, Z 145 Mayer, J 63 Mayers, D 74 Meckling, W 110 GOLD PAGINATION (M2429).indd 189 189 Mehrpouya, A 132 Mendenhall, R 94 mergers and acquisitions 37–9 Merton, R 85, 95 Metrick, A 26 Milhaupt, C 134 Miller, M 74 Ming, K 94 Minor, D 92 Minow, N 143 Modest, D 91 Monk, A 132 Monks, R 143 Morgenstern, O 76 Mossin, J 73 mutual funds 16, 23, 85, 86, 111, 113 Muzay, K 74, 85 Myners, P 39, 93–4, 107–8, 121 Nanda, V 93 Norway 123, 124, 125, 127, 130, 132, 134 Nosfinger, J 78 Odean, T 77 Oldfield, S 99 Osthoff, P 144 Parwada, J 113, 121 pension funds 15–16, 33, 104–5, 107–10, 111–14, 116, 150 Phillips, W 46 Porter, M 143 POSIT crossing platform 57 Posner, R 46, 47–8, 87 Post, T 53, 59 Pozen, R 8, 14 Pulliam, S 164 Qatar 125, 134 Qui, J 27 Radisich, A 94 Rajan, A 29, 37 Reilly, M 95, 143 Revell, J 111 risk management 11–12, 27, 34, 36, 53, 72–80, 97, 157–8 Roll, R 75, 91 Rose, P 134 15/11/10 15:25:39 190 Fiduciary finance Rosenberg, B 106 Ross, S 74–5, 110 Roxburgh, C 163 Rubinstein, M 78, 82 Russia 124, 125, 134 Ryan, R 163 Sais, R 78 Samuelson, P 74, 87, 88–9, 166 Saudi Arabia 124, 125 Scharfstein, D 78, 152 Scholes, M 74 Schwartz, E 92 Schwartzman, S 134 Searle, J 164 Seigel, L 49 Servaes, H 39, 111 Sharpe, W 59, 73–4, 82, 85, 88–9, 91, 97, 106, 163, 166 Shefrin, H 77 Shiller, R 48, 76, 77–8 Shleifer, A 76, 78, 82, 94, 155 Short, H 143 Siegel, L 75 Simon, H 76 Singapore 123, 124, 125, 132, 134, 135 Sirri, E 54, 93, 113 Song, W 142 Soros, G 43 South Korea 125, 146 sovereign wealth funds, rise of 122–35 and accountability 124–6 Australia’s Future Fund 124, 125, 127–8, 134 CAPM-style investing 131 corporate governance implications 131–2 cross-border takeovers and investments 123 definition and history 123–8 diversification outcomes, potential 131 domicile importance 129 and energy prices 123–4 foreign asset choices and home bias 130 and foreign influence on sensitive industries 126 and globalization 123–4, 131 growth predictions 124 GOLD PAGINATION (M2429).indd 190 international markets, impact on 131 International Working Group of Sovereign Wealth Funds (IWG) 126 and investment disclosures 127–8 investment governance structures 132 investment strategies 123, 129–31 market reaction to 129 market stability impact 130–31 private equity investment patterns 130 and publicly traded stock company acquisitions 129 stock price effects of acquisitions and disposals 130 and transparency 129 see also investment business Spain 139 Spiegel, M 39 Starks, L 142 Statman, M 43, 77, 144, 150 Stein, J 78, 152 sustainable investment strategies and fiduciary activism 136–50 and climate change debate 140–41 core sustainable investment 138 economic returns from ESG investment strategies 143–8 environmental, social and governance (ESG) factors 137, 138, 139–40, 143–8 ESG issues, institutional activism on 141–3, 144 fiduciaries and stakeholder involvement and voting powers 142–3 history of 138 institutional shareholding and performance 142–3, 144–5 market indices, use of 138–9, 143 monitoring of corporate officers and investee firms 143 and ownership stakes 141 and regulatory reforms 139, 144 research methodology problems 145 socially responsible investment 137, 138, 144 sustainability indices 146–8 15/11/10 15:25:39 Index sustainable investment marketplace 137–41 see also investment business Szewczyk, S 142 Thaler, R 77 Thel, S 87 Thorley, S 98 Tint, L 163 Titman, S 85–6, 98 Tkac, P 110, 113 Treynor, J 73, 74, 85, 91, 97 Troutman, M 106 Trowbridge, P 134 Tufano, P 54, 93, 113 Tversky, A 76–7 UAE 124, 125 UK banks nationalized 21 Bubble Act (1719) and trust investment disasters 45–6 investment history 10 media and technology bubble 95–6 pension fund decision-making 107–8, 150 sovereign wealth funds 131, 134 sustainable investment 138, 139, 144 United Nations Environment Programme’s Finance Initiative (UNEP FI) 136, 140, 145 United Nations Principles for Responsible Investment (UN PRI) 139–40, 145, 156 Urwin, R 111 US alternative trading venues 57–8 California Public Employees’ Retirement System (CalPERS) 111–12 corporate bond market, growth of 46 distribution fees to financial advisors 28 fiduciary finance development 14 hedge fund failures 19–20, 163–4 index mutual fund, first 86 institutional ownership of equity 45 GOLD PAGINATION (M2429).indd 191 191 institutional ownership of fund management firms 26–7 investment history 10 investment, lack of early objective standards for 46–7 investment standards, modernization of 46 investment strategies 31 money market funds 21–3, 33, 161 Money Market Mutual Fund Liquidity Facility (AMLF) 23 mutual funds industry scandals 111 mutual funds, performance evaluation of 85 pension fund managers, litigation threats 110 private pensions 15 and prudent investor rule 46–7 public pension funds, investment governance 111–12 real estate as driver of economic growth 19 Reserve Primary Fund liquidation 22 sovereign wealth funds 123, 124–6, 131, 135 sovereign wealth funds and foreign influence on sensitive industries 126 stock returns, cross-sectional variability of 75 sustainable investment 137, 138, 139, 142–3, 146 Wells Fargo index-tracking strategy 86 Vishny, R 78 Von Neumann, J 76 Wahal, S 142 Weinberg, A 112 Wermers, R 74, 97 Whaley, R 94 Williams, A 142 Williams, J 42–3, 44, 68–9, 70, 71, 151 Woolley, P 95–6 Xu, Y 82 15/11/10 15:25:39 GOLD PAGINATION (M2429).indd 192 15/11/10 15:25:39 GOLD PAGINATION (M2429).indd 193 15/11/10 15:25:39 GOLD PAGINATION (M2429).indd 194 15/11/10 15:25:39 GOLD PAGINATION (M2429).indd 195 15/11/10 15:25:39 GOLD PAGINATION (M2429).indd 196 15/11/10 15:25:39 ... developments affecting the investment industry, and considers the role of collective investment funds in the financial markets, and the regulatory landscape that has emerged since the financial markets. .. viii ix x INSTITUTIONAL INVESTMENT AND THE INDUSTRIAL ORGANIZATION OF FIDUCIARY FINANCE An introduction to fiduciary finance The investment business Investment in its institutional setting PART... changes affecting financial markets, fiduciary product segments and risk-taking in broader financial institutions 1.2 FIDUCIARY FINANCE AND THE CAPITAL MARKETS At their core, fiduciary institutions