The Strategic Implementation of an Investment Process in a Funds Management Firm
AbstractOne of several important strategic decisions that have to be made by an active funds management organization is how aggressively it implements its investment process. In this paper we model this decision on the assumption that the organization’s objective is to maximise the present value of its future fee income. We then develop the model using numerical methods in order to demonstrate the impact of several endogenous and exogenous factors on this optimum active position. In particular we highlight that the most aggressive funds are likely to be embryonic funds that have the greatest potential to add value. We also establish that in the event that such funds increase their funds under management; it will be optimum for them to become more index-like. We demonstrate that the extent to which the implementation decision for the active process is a function of a number of factors including the alpha and risk characteristics of the active component of the portfolio, the risk tolerance of the promoting organization and the relationship between performance and future fund flows. Our findings have extensive implications ranging from the choice of investment managers by investors to the functioning of capital markets.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney in its series Working Paper Series with number 17.
Length: 24 pages
Date of creation: 01 Sep 2012
Date of revision:
Contact details of provider:
Postal: PO Box 123, Broadway, NSW 2007, Australia
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.uts.edu.au/research-and-teaching/our-research/paul-woolley-centre
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-10-13 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jonathan B. Berk & Richard C. Green, 2004.
"Mutual Fund Flows and Performance in Rational Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 112(6), pages 1269-1295, December.
- Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," FAME Research Paper Series rp100, International Center for Financial Asset Management and Engineering.
- Jonathan B. Berk & Richard C. Green, 2002. "Mutual Fund Flows and Performance in Rational Markets," NBER Working Papers 9275, National Bureau of Economic Research, Inc.
- Lucia Milone & Paolo Pellizzari, 2009. "Mutual funds flows and the "Sheriff of Nottingham" effect," Working Papers 188, Department of Applied Mathematics, Università Ca' Foscari Venezia.
- Richard B. Evans, 2010. "Mutual Fund Incubation," Journal of Finance, American Finance Association, vol. 65(4), pages 1581-1611, 08.
- Diane Del Guercio & Paula A. Tkac, 2001.
"Star power: the effect of Morningstar ratings on mutual fund flows,"
2001-15, Federal Reserve Bank of Atlanta.
- Guercio, Diane Del & Tkac, Paula A., 2008. "Star Power: The Effect of Monrningstar Ratings on Mutual Fund Flow," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(04), pages 907-936, December.
- Danny Yeung & Paolo Pellizzari & Ron Bird & Sazali Abidin, 2012. "Diversification Versus Concentration ......... and the Winner Is?," Working Paper Series 18, The Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.