The primary activity of PCAM is funding novel research based on questions posed by our industry partners, and then disseminating this research.
2021 PCAM Funded Research
Real effects of environmental activist investing (S. Lakshmi Naaraayanan, London Business School; Kunal Sachdeva, Rice U.; and Varun Sharma, London Business School)
There is increasing pressure on pension fund managers to consider more socially activist investing. This work studies the real effects of environmental activist investing. Using plant-level data, the authors find preliminary results that targeted firms reduce their toxic releases, greenhouse gas emissions, and cancer-causing pollution. Improvements in air quality within a one-mile radius of targeted plants suggest potentially important externalities to local economies. These improvements may come through increased capital expenditures on new abatement initiatives. The study accounts for alternative explanations of decline in production, reporting biases, and forms of selection, while also providing evidence supporting the external validity of environmental activism. Overall, the study will examine if engagements are an effective tool for long-term shareholders to address climate change risks.
The case for actively managed funds (Allan Timmermann, UC San Diego and Russell Wermers, U. of Maryland)
Should pension funds invest in more actively managed funds? The purpose of this study is investigating the efficacy of different management structures of pension funds, in the dimensions of (1) active vs. passive management, (2) internal vs. external management, (3) public vs. private investments, (4) the structure of liabilities (e.g., public vs. private pension funds), and (5) interactions between these dimensions. The authors intend to use both public and proprietary datasets in our analysis. The goal is to provide timely research that informs major pension funds.
Environmental externalities of hedge fund activism (Pat Akey, U. of Toronto and Ian Appel, Boston College)
Pressure on investors to practice environmentally sensitive investing makes sense only if it has a desirable impact. The authors propose to study how improving economic efficiency interacts with corporate environmental behavior and sustainability through the lens of hedge fund activism. Using plant-chemical level data from the EPA, they find evidence that activism campaigns are associated with a 17 percent drop in emissions for chemicals at plants of targeted firms. This decline in emissions is present in both chemicals that are known to cause harm to humans and those known to have adverse effects on the environment. These findings suggest that the benefits of activism are not necessarily confined to shareholders, but may also extend to other stakeholders (e.g., the local community) affected by firms’ emissions. In future work, the authors plan to highlight the extent to which “socially responsible” activism funds or climate-risk management strategies could explain these findings, as well as to further explore how activist hedge funds are able to improve productivity and reduce emissions.
2020 PCAM Funded Research
Strategic Asset Allocation (Redouane Elkahmi, U. of Toronto; Jacky S.H. Lee, HOOPP; and Marco Salerno, U. of Toronto)
The views of institutional investors change in response to the macroeconomic landscape, thus impacting portfolio asset allocation. A top challenge for asset managers is overseeing these adjustments empirically with limited risk. This project analyzed the design of a strategic portfolio that is exposed to multiple risk premia and is resilient across multiple economic cycles.
- The authors provide a methodology that incorporates views on the likelihood of economic regimes (e.g., growth and inflation).
- Using data on equities, bonds and commodities, they show both in simulation and empirically that the approach generates stable portfolio weights and a performance that is minimally affected by forecast errors.
Pension Fund Allocations to Private Equity and Portfolio Risk and Return (Arthur Korteweg, USC and Stavros Panageas, UCLA)
Investing in private equity is becoming more prominent in institutional investing, but performance evaluation is difficult. This work provides a method to evaluate private equity investments by using investor-specific stochastic discount factors. The method allows a direct way of answering the question of whether a given investor could benefit from investing in private equity. The approach is illustrated by focusing on a particular category of investors, public pension plans.
The authors investigate:
- whether pension plans allocated optimal amounts to private equity investments;
- whether the returns of these private equity investments could have been obtained by long-only strategies in publicly traded equities;
- whether the private equity portfolio of pension plans outperformed investment private equity strategies and;
- whether there are governance or other pension plan characteristics that correlate with risk-adjusted private equity performance or simply risk-taking.
Diversity and Inclusion and Portfolio Returns: Is there a trade-off? (Prashant Bharadwaj, Amanda Bauer, and Frances Lu, UC San Diego)
Pension funds and public investors have re-evaluated the diversity of managers that invest their funds and the firms they invest in. This project focuses on analysis of alternative ways to gain exposure to a D&I factor and the effects of this on portfolio risks and returns. The authors create a new data set on “emerging managers” returns.
- Importance of diversity is justified theoretically and empirically.
- When one cannot target diverse firms directly, emerging manager programs are a way to improve diversity.
- No clear evidence of performance differences; no diversity-returns trade-off.
- Emerging manager programs deliver on diversity goals.