The State of Origin and the funds manager’s game
AUTHOR: Lachlan Colquhoun DATE: 06.09.07 ISSUE 1, 2007
Is geography a factor in a fund management performance? Lachlan Colquhoun meets a team of researchers who have been analysing the significance of location in investors’ success.
In the modern share market, with its instant information systems and corporate transparency, how important is a fund manager’s actual location? Is there any benefit to be gained from fund managers being based in the same cities as the companies they invest in?
| “We have a more open, transparent and fully disclosed market now than we have ever had,” says Associate Professor David Gallagher, Director of the Centre of Research in Finance at the Australian School of Business. |
Exploring the “State of Origin” theory for fund managers is the subject of an Australian School of Business research project led by David Gallagher, Associate Professor of Finance and Director of the School’s Centre for Research in Finance.
With fellow UNSW academic Dr Kingsley Fong and PhD student Adrian Lee, Associate Professor Gallagher’s team of researchers has been examining the performance of fund managers around the country, utilising highly granular data that includes portfolio holdings and daily transactions, and in this particular study their work matches this data against companies headquartered in the same location as fund managers.
“Obviously if you are looking at promoting a free and fair market place and looking to engender confidence and informational efficiency in your market, then you would hope there were no advantages for managers located in the same city as those stocks also headquartered in the same location,” says Associate Professor Gallagher.
“The Australian Securities Exchange and the regulators need to ensure the market has that kind of integrity, so this is one good test of how well our system is working.”
Working from a fund manager database which was originally compiled in cooperation with Mercer Investment Consulting, Associate Professor Gallagher and his team have been analysing a representative sample of around 30 fund managers, mainly based in Sydney and Melbourne, but also from other capital cities. All were investing in Australian equities.
“Given these fund managers are trading securities on an active basis, we are examining if they are deriving an informational advantage simply because they locate in cities in which the corporate headquarters of firms they invest in is also the same,” says Associate Professor Gallagher.
One of the first findings was that these active Australian equity managers had been significantly outperforming passive benchmarks, a result which raised the issue of whether their proximity to the stock they invested in was in fact delivering an informational advantage.
However, on further investigation it became clear that even though active managers outperformed, there was no real statistical evidence to show that location represented a critically important advantage.
“The statistics showed that simply being located in the same city as the corporate headquarters of a big listed company doesn’t provide any significant benefits,” says Mr Lee.
More importantly, the results show that the current system is working well. The digital age has ensured that disclosure and price sensitive information arrives very quickly, and efforts by regulators to create more open and transparent markets have achieved the desired outcome.
“I would assume that the informational asymmetries between fund managers in a study like this would have been much greater 20 or 30 years ago, especially given the advances in technology, regulation and disclosure,” says Associate Professor Gallagher.
“Our market has a disclosure regime which is continuous, so when companies need to make price sensitive news announcements all investors can receive that information at the same time, and I’m not sure if that happened to the same degree decades ago.
“And I certainly think we have a more open, transparent and fully disclosed market now than we have ever had, and the way the ASX enforces its business rules and overall surveillance of the market would seem to indicate that there’s no informational advantage on where anyone resides.”
“I think the big takeaway is that the current system promoting informational efficiency is working well. Investors should have confidence that fund managers are not necessarily generating their outperformance simply because they appear to be more proximate to the listed companies in which they invest.”