This paper studies the portfolio choice of strategic fund managers in the presence of a peer-based underperformance penalty. Evidence is taken from the Colombian pension fund management industry, where six asset managers are in charge of portfolio allocation for the mandatory contributions of the working population. These managers are subject to a peer-based underperformance penalty, known as the Minimum Return Guarantee. The trading behavior by the managers is studied before and after a change in the strictness of the guarantee in June 2007. The evidence suggests that a tighter minimum return guarantee results in more trading in the direction of peers, a behavior that is more pronounced for underperforming managers. These managers rebalance their portfolios by buying securities in which they are underexposed relative to their peers, as opposed to selling assets in which they are overexposed. Overall, the results suggest that incentives for managers to be close to industry benchmarks play an important role in the portfolio allocation of these funds.
Details
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Author
Morales, Alvaro Pedraza
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Document Date
2014/07/01
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Document Type
Policy Research Working Paper
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Report Number
WPS6994
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2014/07/01
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Disclosure Status
Disclosed
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Doc Name
Strategic interactions and portfolio choice in money management : evidence from Colombian pension funds
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Keywords
Finance & Private Sector Development;supervision of pension fund;relative performance;international social security;number of shares;portfolio weight;dispersion of return;share of asset;change in behavior;terms of performance;domestic capital market;individual retirement account;excessive risk taking;risk taking behavior;strategic behavior;types of asset;institutional asset manager;domestic corporate debt;optimal asset allocation;share of stock;direction of trade;forms of compensation;cumulative distribution function;
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Citation
Morales, Alvaro Pedraza
Strategic interactions and portfolio choice in money management : evidence from Colombian pension funds (English). Policy Research working paper ; no. WPS 6994 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/885731468022750265/Strategic-interactions-and-portfolio-choice-in-money-management-evidence-from-Colombian-pension-funds