Investor Heterogeneity and the Cross-section of U.K. Investment Trust Performance

Abstract

Helpful comments received from an anonymous reviewer.Address correspondence to Professor J. Fletcher, Department of Accounting and Finance, University of Strathclyde, Curran Building, 100 Cathedral Street, Glasgow, G4 0LN, United Kingdom, phone: +44 (0) 141 548 4963, fax: +44 (0) 141 552 3547, email: j.fletcher@strath.ac.uk INVESTOR HETEROGENEITY AND THE CROSS-SECTION OF U.K. INVESTMENT TRUST PERFORMANCE ABSTRACTWe use the upper and lower bounds derived by Ferson and Lin(2010) to examine the impact of investor heterogeneity on the performance of U.K. investment trusts relative to alternative linear factor models. We find using the upper bounds that investor heterogeneity has an important impact for nearly all investment trusts. The upper bounds are large in economic terms and significantly different from zero. We find no evidence of any trusts where all investors agree on the sign of performance beyond what we expect by chance. Using the lower bound, we find that trusts with a larger disagreement about trust performance have a weaker relation between the trust premium and past Net Asset Value (NAV) performance.

An examination of the benefits of dynamic trading strategies in U.K. closed-end funds

“…The finding that the UMV strategy adds value is interesting given the mixed empirical evidence as to whether individual closed-end funds can deliver significant value added to investors. Fletcher and Marshall(2014) find that investment sector portfolios of closed-end funds have neutral performance and there are no funds with either significant superior or inferior performance beyond what we would expect in a world with zero performance. Bredin, Cuthbertson, Nitzsce and Thomas(2014) find more positive results about the performance of closed-end funds.…”

“…The poor performance of the Passive/Managed strategy is consistent with Stivers and Sun(2014). The lack of significant Jensen performance shows that dynamic trading strategies do not deliver significant value added for investors and is similar to the neutral closed-end fund Jensen performance in Fletcher and Marshall(2014).…”

“…equity closed-end funds can be a useful investment vehicle even where the underlying funds have neutral performance (Fletcher and Marshall(2014)). Our results also suggest that closed-end fund managers might wish to consider exploiting the optimal use of return predictability in their trading strategies using lagged information variables with the highest persistence levels.…”

“…Our study uses portfolios of closed-end funds rather than test assets such as size/book-to-market (BM) portfolios. The attraction of using managed funds is that it allows us to consider whether dynamic trading strategies can deliver significant value added to investors even where the funds have neutral performance (Fletcher and Marshall(2014)). By focusing on closed-end funds and the UMV strategy, we extend the prior studies of the performance of dynamic trading strategies in managed funds such as Avramov and Wermers(2006), Avramov et al(2011), and Banegas et al(2013) among others by using the UMV strategy and focusing on closed-end funds.…”

Testing the mixture of distributions hypothesis on target stocks

“…Representative investor theories explain these asymmetries by leverage effects, by volatility feedback mechanisms which raise the risk premium and reduce the impact of good news relative to bad news, and by stochastic bubble models in which the asymmetry is caused by the bursting of the bubble (see inter alia, Black (1976), Blanchard andWatson (1982), Christie (1982), French, Schwert and Stambaugh (1987) and Campbell and Hentschel (1992), Abreu and Brunnermeier (2003), Bhattacharya and Yu (2008) and Lin and Sornet (2013)). The alternative explanation is found in the microstructure and investor heterogeneity theories whereby investors differ in their opinions about the fundamental values of stocks (see inter alia Holthausen and Verrecchia (1990), Harris and Raviv (1993), Shalen (1993), Easley, Kiefer and O'Hara (1997), Ackert et al (2002), Goyal and Santa-Clara (2003), Huang and Thakor (2013) and Fletcher and Marshall (2014)). This latter explanation is recognized in the MDH and microstructure literatures to drive the relation between trading volumes and return volatilities, and is supported in our study of the market for corporate control.…”