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Strategic interactions and portfolio choice in money management : evidence from Colombian pension funds, Volume 1
Author:Morales, Alvaro Pedraza; Country:Colombia;
Date Stored:2014/07/31Document Date:2014/07/01
Document Type:Policy Research Working PaperSubTopics:Emerging Markets; Markets and Market Access; Debt Markets; Corporate Law; Mutual Funds
Language:EnglishMajor Sector:Finance
Rel. Proj ID:1W-Lessons From The Global Crisis And The Recovery Process -- -- P146223;Region:Latin America & Caribbean
Report Number:WPS6994Sub Sectors:Microfinance; SME Finance; Housing finance; Banking; Capital markets
Collection Title:Policy Research working paper ; no. WPS 6994Volume No:1

Summary: 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.

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