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Should Canada Require Its Pension Funds to Invest More Domestically? (2024) with Keith Ambachtsheer and Chris Flynn, Global Risk Institute

We analyze the domestic investments of Canadian pensions funds, assess the risk-return trade offs between domestic and foreign investments, and investigate the barriers to investing in Canada. We show that Canadian pension funds invest disproportionately large amounts of capital in Canada, particularly in bond-like asset classes such as fixed income and real estate. However, over the past decade their domestic investments have proportionally decreased as part of a shift toward global asset diversification. One driver of this decline is the lack of strategic assets available for sale in Canada, combined with the increased availability of such assets in other countries. We propose actionable solutions to mitigate the lack of strategic assets problem and create win-win outcomes alike for the Canadian economy and for Canadian pension funds. However, we caution against adopting government policies that mandate Canadian pension funds to invest domestically, as such policies will upset the funds’ risk-return calibrations and expose pension plan members to potential financial losses.

Investor Factors (2024), with Laurent Calvet, Samuli Knupfer, and Jens Kvaerner, forthcoming in Journal of Finance

Best Paper in Asset Pricing and Market Microstructure, NFA Conference 2021
Morgan Stanley Best Paper Award in Investments, Academic Research Colloquium 2021

This paper develops an empirical methodology for extracting pricing factors from investor portfolio data. We apply this approach to an administrative dataset containing the stockholdings of Norwegian individual investors in 1997-2017. A two-factor model, featuring the market portfolio and a long-short portfolio constructed from the holdings of investors sorted by age or wealth, explains both the common variation in portfolio holdings and the cross-section of stock returns. Portfolio tilts toward the investor factor correlate with indebtedness, macroeconomic exposure, gender, and investment experience. Our paper illustrates the benefits of using holdings data for explaining the risk premia of financial assets.

Direct Value Creation and Capture in the Pension Fund Industry: Five Examples (2024), with Eduard van Gelderen and Barbara Zvan, forthcoming in Journal of Alternative Investments

How can pension funds create and capture value in financial markets? We study four landmark transactions made by large Canadian pension funds: OTPP’s acquisition of Cadillac Fairview, PSP’s development of Mahi Pono, CDPQ’s development of Réseau Express Métropolitain, and CPP Investments’s acquisition of Antares Capital. The funds create and capture value by achieving scale in strategic markets, reducing fee drag, coordinating stakeholder groups, and developing internal synergies. We identify the primary risks, discuss the risk mitigation strategies implemented by the funds, and then study how UPP, a smaller pension fund, emulates some of these strategies on a smaller scale.

Menu proliferation and entry deterrence (2023), with David Schumacher and Ali Shahrad, Review of Asset Pricing Studies Vol. 13:4, 784-829

Best Paper Using EUROFIDAI Daily Data Award 2023

Why do so few mutual fund families launch so many funds and styles around the World? We posit that launching numerous funds on an increasingly granular style grid allows incumbent families to congest the product space and deter market entry. Key to this argument is the persistently low dimensionality of the mutual fund product space, which we establish by analyzing the names of over 40,000 equity funds sold in 91 countries between 1931 and 2015. Over time, the strategy of filling up the style grid has led to the dominance of few families offering large, granular, and similar fund menus.

Green urban development: The impact investment strategy of Canadian pension funds (2022), with Alexander D. Beath, Maaike Van Bragt, Yuedan Liu, and Quentin Spehner, Journal of Sustainable Real Estate Vol. 14:1, 75-94

We investigate the investment strategy that large Canadian pension funds implement in the private real estate market. Even though they manage just 6% of global pension assets in our data, Canadian pension funds are responsible for 60% of the total value of direct real estate deals involving a pension fund. Their portfolio strategy combines global asset diversification with a local impact strategy that consists of internally developing and green urban properties. Using a common benchmarking methodology across funds, we show that this strategy delivers superior performance net of fees and drives the green development of major city centers.

The Canadian pension fund model: A quantitative portrait (2021), with Alexander D. Beath, Chris Flynn, and Quentin Spehner, Journal of Portfolio Management, Vol: 47(5), 159-177

We show that, between 2004 and 2018, Canadian pension funds outperformed their international peers both in terms of asset performance and liability hedging. We find that a central factor driving this success is the implementation of a three-pillar business model that consists of i) managing assets in-house to reduce costs, ii) redeploying resources to investment teams for each asset class, and iii) channeling capital toward growth assets that increase portfolio efficiency and hedge liability risks. This model works best for funds whose pension liabilities are indexed to inflation.

Who are the value and growth investors? (2017), with Laurent Calvet and Paolo Sodini,
The Journal of Finance, Vol. 72:1, 5-46 (Lead Article)

CFR Best Paper Award, 14th Colloquium on Financial Markets, 2015

In the past century the financial markets have exhibited a remarkable anomaly where the returns from value stocks exceed the returns from growth stocks. To give an idea of how much value stocks outperform growth stocks, the return differential (value premium) is 4-6% on average per year. This is comparable to the risk compensation of the entire stock market. The outperformance of value stocks goes against standard asset pricing theory which predicts that value stocks will earn lower returns because they are less volatile. In this paper, we analyze the determinants of value and growth investing for the first time and provide a clearer understanding of what is driving the value premium anomaly

Hedging labor income risk (2012), with Thomas Jansson, Christine Parlour, and Johan Walden Journal of Financial Economics, Vol. 105:3, 622-639

Labor income represents the households' greatest source of wealth. Because of this, we expect cyclical stocks to yield high returns to compensate for the fact that they will suffer large losses during economic recessions when jobs are on the line. Surprisingly, empirical studies have struggled to discover convincing evidence that labor income risk is as important in financial markets as we think. In this paper we contribute clear evidence that labor income risk does indeed have an impact on households' investment decisions.

Reaching for yield or resiliency? Explaining the shift in Canadian pension plan portfolios (2021), with Nicholas Byrne, Jean-Sebastien Fontaine, Hayden Ford, Jason Ho, and Chelsea Mitchell, Bank of Canada Staff Analytical Note, 20

"Reach for yield" - this is the commonly heard explanation for why pension plans shift their portfolios toward alternative assets. But we show that the new portfolios also hold more bonds, offer lower average returns, and produce smaller and less volatile solvency deficits. These shifts are part of a broader strategy to reduce solvency risk.

Concentration in the market of authorized participants of US fixed-income exchange-traded funds (2020) with Rohan Arora, Guillaume Ouellet-Leblanc, Adriano Palumbo, and Ryan Shotlander, Bank of Canada Staff Analytical Note, 27

We show that a small number of authorized participants (APs) actively create and redeem shares of US-listed fixed-income exchange-traded funds (FI-ETFs). In 2019, three APs performed 82% of gross creations and redemptions of FI-ETF shares. In contrast, the group of active APs for equity ETFs was much more diverse.

Creations and redemptions in fixed-income exchange-traded funds: A shift from bonds to cash (2019), with Rohan Arora, Guillaume Ouellet-Leblanc, Adriano Palumbo, and Ryan Shotlander, Bank of Canada Staff Analytical Note, 34

The creation and redemption activity of fixed-income exchange-traded funds listed in the United States has shifted. Funds of established issuers have traditionally exchanged their shares for baskets of bonds. In contrast, young funds tend to create and redeem their shares almost exclusively in cash. Cash transactions imply that new funds are taking on exposure to liquidity risk. This has implications for financial stability.

Working Papers

How Do Retiree Health Benefit Promises Affect Municipal Financing? (2023), with Sara Holland and Sean Wilkoff

U.S. public sector employers have promised over $1 trillion in retiree health and other post-employment benefits (OPEBs) – an unfunded liability of the same order of magnitude as that of U.S. public pensions. We show that states with greater OPEB liabilities and lower funding ratios have higher municipal bond yields. These effects are strongest for states with high health costs, high exposure to the risk of rising health costs, and low ability to renegotiate retiree health plans. Our results suggest that investors price health risks, and plan design directly impacts the magnitude of these risks.

Five Facts About the Money Holdings of Individuals and Firms (2022), with Laurent Calvet and Jens Kvaerner

Using administrative panels from Norway and the Netherlands and the US Survey of Consumer Finances, we document five facts about the cash share -- the ratio of money holdings to financial wealth -- held by individuals and firms. (i) Deposit rates and the aggregate cash shares of individuals and firms have decreased substantially since the 1990's. (ii) The decline in individuals' aggregate cash share is driven by the wealthiest 10%. (iii) Deposit rates predict the wealthy's cash share. (iv) Interest income no longer represents a significant proportion of income for wealthy individuals. (v) Firms exhibit similar moneyholding dynamics as individuals.

A supply and demand approach to capital markets (2023), with Laurent Calvet and Evan Jo

We develop an empirically tractable supply and demand system of financial markets, which explains the cost and quantity of capital used by individual firms. Investor preferences, biases, and risk assessments drive capital supply, while a firm’s profitability and other characteristics drive demand. Firm sizes and capital costs are endogenously determined in general equilibrium. Using theoretically motivated instruments, we estimate the supply and demand schedules of over 1,200 U.S. firms. Our system produces accurate forecasts of firm sizes and capital costs. We use the estimated system to quantify the equilibrium sensitivities of size and capital cost to firm and investor characteristics.

Why do homeowners invest the bulk of their wealth in their home? (2020), with Laurent Barras

Despite the well-known benefits of diversification, homeowners invest mostly in their home. A common explanation for this pattern is that homeowners are constrained to fully own the home they want to live in. We refute this explanation and show that the predominance of housing stems from its distinct investment value. We then provide clarity on the value of the housing investment. Because owning a home provides a steady stream of housing consumption, it is equivalent to purchasing a perpetual bond indexed to that home. Housing thus plays a special role in the portfolio as one of the homeowner's risk-free assets.

Grants and Fellowships

Insight Grant, SSHRC (Canada), 2012-2015 ($132,580)

Insight Grant, SSHRC (Canada), 2020-2022 ($68,000)

Insight Grant, SSHRC (Canada), 2023-2025 ($66,500)

Observatoire de l’Epargne Europeenne, 2021-2022 (€25,000)

National Pension Hub Research Award, 2021-2022 ($22,922)

National Pension Hub Research Award, 2018-2019 ($70,000)

Nouveau-Chercheur Grant, FQRSC (Quebec), 2015-2018 ($50,292)

McGill Internal Development Grant, 2011-2012 ($4,000)

Fisher Center for Real Estate and Urban Economics Grant (Berkeley), 2009-2010

White Dissertation Fellowship (Berkeley), 2008-2009

Mini-grant for data collection, I.B.E.R. (Berkeley), 2009

Dean Witter Foundation Graduate Fellowship (Berkeley), 2004-2008

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