Concerned with excessive risk taking, regulators worldwide generally prohibit private
pension funds from charging performance-based fees. Instead, the premise underlying the regulation of private pension schemes (and other retail-oriented funds) is that competition among fund managers should provide them with the incentives to make investment decisions that would serve their clients?
long-term interests. Using a regulatory experiment from Israel, we compare the effects of incentive fees and competition on the performance of retirement savings schemes. Taking advantage of a unique institutional setup, we compare three exogenously-given types of long-term savings schemes operated by the same management companies: (i) funds with performance-based fees, facing no competition; (ii) funds with AUM-based fees, facing low competitive pressure; and (iii) funds with AUM-based fees, operating in a highly competitive environment. We find that funds with performance-based fees exhibit somewhat higher risk (depending on the measure used) but significantly higher risk-adjusted returns. By contrast, we find no evidence that competitive pressure leads to improved performance. We conclude that incentives and competition are not perfect substitutes in the retirement savings industry. Our analysis also suggests that the pervasive regulatory restrictions on the use of performance-based fees in pension fund management may be costly for savers in the long-run and should be reconsidered.
We show that mutual funds compete for climate-conscious investment flows. In April 2018, Morningstar introduced a climate-focused label for mutual funds. The release of the “Low Carbon Designation” induced reactions on both the demand and supply...Read more
The goal of this paper is to examine whether the stewardship code, which emanated in circumstances that are specific to the United Kingdom (UK), is capable of transposition to other jurisdictions that experience different corporate structures as...Read more
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The United Kingdom introduced a Stewardship Code in 2010, followed by a slightly revised iteration in 2012 (the “first version” of the SC). It was premised upon the corporate governance advantages of engagement between institutional investors and...Read more