If you’ve invested in mutual funds or a similar professionally managed portfolio, you’re undoubtedly aware that management fees can take a bite out of your quarterly gains. Sometimes, it can be difficult not to wonder if your fund manager’s performance justifies those fees.
Hilla Skiba knows just how you feel – and she and her collaborators have secured a grant of more than $150,000 from the Canadian Social Sciences and Humanities Research Council to find answers.
Over the next five years, Skiba, an associate professor in the CSU College of Business Department of Finance and Real Estate and a Chartered Financial Analyst, joins researchers from the University of Wisconsin-Madison and Brock University working under the grant. The trio hopes to better understand money managers’ decisions around the world and understand the implications of their strategies on individuals’ funds and worldwide markets.
“Anecdotal evidence and a small body of research suggest that money managers’ benefit to investors may be overstated at times,” Skiba said. “Incomplete disclosures, high management fees and siding with firms management when voting on shareholder items can interfere with managers’ charge to manage funds with clients’ best interests.”
The grant supports three independent research projects that investigate geographical bias in investment strategies, practices that mask low-effort management tactics and changes in funds’ holdings in response to corporate actions. The research, funded by the Canadian government, hopes to illuminate money managers’ actions with findings that are useful to everyone from individual investors to academics and policymakers.
Cutting Through Deceptions
In an area of research likely to resonate with private investors, Skiba and her collaborators will dig into how actively fund administrators manage portfolios. By analyzing funds’ fees and disclosure processes and how each one performs relative to similar funds, Skiba hopes to gain a better understanding of how frequently portfolio managers are charging fees that aren’t justified by their level of effort or profitability.
The research will investigate a couple tactics managers may use to occlude their passive management tactics: closet mimicking and window dressing. When investors engage in closet mimicking, their returns largely mirror the performance of the market while charging clients’ fees that don’t reflect such a hands-off management style. The grant will also support Skiba’s investigations into window dressing, the practice of hiding a fund’s true portfolio of funds by making last-minute investments shortly before making periodic reporting.
“There is potential for a few bad actors to passively manage their clients’ money engaging in practices that make it difficult for the average personal investor to discover the inaction,” Skiba said. “We hope to find ways to identify these practices so policymakers can better regulate the industry and shield everyday investors from these egregious practices.
Going Deeper into the Numbers
Skiba and her colleagues will also use the grant to investigate other practices that should resonate more with financial professionals and policy wonks than private investors.
One area Skiba will investigate is money managers’ home bias, the tendency of investors to outweigh investments in their own region at the expense of global opportunities. The bias has been well documented by other researchers, but Skiba and her colleagues hope to gain a better understanding on how portfolio managers’ home bias changes over time. Researchers will also investigate how managers votes in corporate agenda items impact funds’ holdings, and can be applied to better understand corporate activism.
“It’s always better for investors to know how their funds are being used,” Skiba explained. “We hope to shed light on practices that impact everyone from individuals to corporations and may necessitate more required disclosures or changes in financial regulation.”
