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.
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
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.
"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.
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.
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.
We model capital markets as a parsimonious system of simultaneous linear equations expressing firm-level supply and demand for financial capital. 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. We quantify the equilibrium sensitivities of firm size and capital cost to systematic risks, social score, profitability, and asset tangibility. The paper highlights the usefulness of empirical supply and demand systems at the intersection of corporate finance and asset pricing.
Best Paper in Asset Pricing and Market Microstructure, Northern Finance Association Conference 2021
Morgan Stanley Best Paper Award in Investments, Academic Research Colloquium 2021
We construct a parsimonious set of equity factors by sorting stocks according to the sociodemographic characteristics of the individual investors who own them. The analysis uses administrative data on the stockholdings of Norwegian investors in 1997-2018. Consistent with financial theory, a mature-minus-young factor, a high wealth-minus-low wealth, and the market factor price stock returns. Our three factors span size, value, investment, profitability, and momentum, and perform well in out-of-sample bootstrap tests. The tilts of investor portfolios toward the new factors are driven by wealth, indebtedness, macroeconomic exposure, age, gender, education, and investment experience. Our results are consistent with hedging and sentiment jointly driving portfolio decisions and risk premia.
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.
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.
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.
Research grants & fellowships
Observatoire de l’Epargne Europeenne, 2021-2022 (€25,000) National Pension Hub Research Award, 2021-2022 ($22,922) Insight Grant, SSHRC (Canada), 2020-2022 ($68,000)
National Pension Hub Research Award, 2018-2019 ($70,000) Nouveau-Chercheur Grant, FQRSC (Quebec), 2015-2018 ($50,292) Insight Grant, SSHRC (Canada), 2012-2015 ($132,580)
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