Punz, Michael
(2017)
Essays on delegated portfolio management.
PhD thesis, London School of Economics and Political Science.
Abstract
This thesis studies how financial market outcomes are affected by the reputational concerns of fund managers. The first chapter presents a model in which a fund manager trades in an environment with uncertain market liquidity. The fund manager trades off expected profits in the initial period and learning relating to the investment strategy in the successive period. Surprisingly, the indirect incentives do not cause the manager to focus on short-term returns to impress investors but result in a behaviour that may be described as inefficient "long termism". The model may help explain empirical puzzles such as the limits of arbitrage, the convex flow-performance relationship and the excessive trading of fund managers.
The second chapter focuses on the asset pricing implications of fund flows motivated by past performance. By investing in an out-performing asset, fund managers can improve their reputations and therefore experience inflows of money into their funds. In my model, the value of a fund manager’s reputation is state dependent. In the case of an inefficient asset management market, I show that asset prices are increasing in their beta. Furthermore, the asset price depends on asset supply in my model.
The third chapter analyses the size of the active management sector in a model where fund managers have reputational concerns. I show that the size of the active management sector depends on the skill of the fund managers in the sector in a non-monotone manner. The asset choices of fund managers are influenced by reputational concerns, and the information revelation of the skill of the individual fund managers depends on market outcomes. The model predicts that the amount of money invested in the active management sector may shrink sharply following rare events.
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