Dr. Valery Polkovnichenko
Dr. Kelsey Wei
Dr. Feng Zhao
An examination of counterintuitive investor behavior has won a best paper award for three Naveen Jindal School of Management finance professors.
The trio investigated the puzzle of why actively managed mutual funds attract more investment dollars even though they generally perform more poorly than their passively managed counterparts.
Associate Professors Valery Polkovnichenko and Feng Zhao and Assistant Professor Kelsey Wei took home the Best Paper Award from the 2013 Asian Conference of the Financial Management Association International for their research.
About 180 papers were submitted to the conference, held this year at Fudan University in Shanghai. About 75 of the submissions were presented to conferees. The awards are based on a combination of reviewer scores from the initial paper evaluations and recommendations of the respective program’s track chairs.
Cautious Risk-Takers: Investor Preferences and Demand for Active Management stood out in part because Wei, Zhao and Polkovnichenko – who recently worked at the Federal Reserve Board in Washington, D.C., during an academic leave – took a new approach. Whereas previous research had focused on fund-manager actions and fund performance, the JSOM trio looked at investor demand.
Studying a sample of U.S. domestic mutual funds between 1996 and 2008 to begin their investigation, the researchers theorized that both risk aversion and risk-taking for the sake of gain play important roles in the demand for active management.
Polkovnichenko, Wei and Zhao expanded the knowledge base on the topic by demonstrating that actively managed growth and value funds may serve to capture upside potential and reduce downside risk, respectively. Specifically, flows into active growth funds are strongly influenced by investors’ preference for upside gain while flows into active value funds tend to respond more to investors’ demand for downside protection.
Having identified specific investor preferences as components behind the demand for actively managed funds, the study suggested that fund managers could use those preferences to “better structure their active portfolios to cater to different investor clientele.”
Their framework also included “different testable implications for growth versus value funds,” they wrote, and their results had new implications for the performance evaluation of active funds.