NEWSLETTER of September 27, 2024

The following content has been added at finexpert:

Citi
GLOBAL FAMILY OFFICE 2024 SURVEY REPORT
Our annual survey of family office clients from around the world seeks to capture their investment sentiment, portfolio positioning, family governance and best practices. Consisting of 50 questions, we believe it to be the most global and comprehensive study of its kind. Now in its fifth year, this annual publication offers rare perspectives into the thinking and behaviors of some of the world’s most sophisticated investors: the family offices that we serve. Whereas our inaugural edition drew responses from 71 entities based mainly in North America, this year’s survey saw contributions from 338, two thirds of which came from the rest of the world. >more

Thinking Ahead Institute
GLOBAL TOP 300 PENSION FUNDS
Assets Under Management (AUM) of the top 300 pension funds totalled US$ 22.6 trillion. Assets of top 300 funds increased by 10% in 2023, compared to a decline of 13% in 2022. The top 20 pension funds made up 42% of total AUM in 2023. While equity markets returned positive performance across most regions in 2023, persisting volatility and high uncertainty in the global economy means there is increasing complexity in the investment landscape. The emergence of 3D investing, also known as system-level investing, is timely and crucial. This approach integrates the three dimensions of risk, return and impact, recognising that the returns we seek are only possible within a well-functioning, sustainable system. >more

HSBC
HEIGHTENED VOLATILITY? HEDGE FUNDS COULD HELP WEATHER THE STORM
2024 has been a year which, for many, has confounded market expectations. Heading into the year, the market had priced in a number of interest rate cuts, with the idea from a macroeconomic perspective of a ‘soft-landing’ looking more tangible than alternative scenarios. Indeed, markets seemed to be following this script for the first half of the year. Equities reached new highs, powered by continuous enthusiasm for artificial intelligence, semiconductors, and healthcare and expectations for interest rate cuts during the second half of the year. Moving into the second half of the year , we have experienced a different environment. From the mid-July peaks, equities pulled back as allocators crystallised profits and rotated into other asset classes. The tension underpinning monetary policy and geopolitics came to a head in early August, as markets experienced a sharp, albeit temporal, sell off. >more

Houlihan Lokey
EUROPEAN REAL ESTATE MARKET UPDATE
In 2023, nonlisted real estate capital-raising activity for Europe fell 55% year over year — reaching its lowest levels since at least 2014 — driven by high costs of capital, widening cap rates, and valuation uncertainty. As of March 2024, more than 80% of the capital raised in 2023 had yet to be deployed, causing additional strain on the ability to fundraise. In Q1 2024, European commercial real estate investment amounted to €37 billion (down approximately 40% YoY), marking the slowest start to the year since 2013. As the rate of decline begins to show signs of stabilization, Savills estimates that investment volume in Q2 2024 increased 19% from Q1, driven by capital availability and the low base of investment volume over the past 12 months. >more

THE EFFECTS OF MANDATORY PROFIT-SHARING ON WORKERS AND FIRMS: EVIDENCE FROM FRANCE
Elio Nimier-David, David Alexandre Sraer, and David Thesmar
2024
Since 1967, all French firms with more than 100 employees have been required to share a fraction of their excess profits with their employees. Through this scheme, firms with excess profits distribute, on average, 10.5% of their pre-tax income to workers. In 1990, the eligibility threshold was reduced to 50 employees. We exploit this regulatory change to identify the effects of mandated profit-sharing on firms and their employees. The cost of mandated profit-sharing for firms is evident in the significant bunching at the 100-employee threshold observed prior to the reform, which completely disappears post-reform. Using a difference-in-difference strategy, we find that, at the firm level, mandated profit-sharing (a) increases the labor share by 1.8 percentage points, (b) reduces the profit share by 1.4 percentage points, and (c) has no significant effect on investment and productivity. At the employee level, mandated profit-sharing increases low-skill workers' total compensation and leaves high-skill workers' total compensation unchanged. Overall, mandated profit-sharing redistributes excess profits to lower-skill workers in the firm without generating significant distortions or productivity effects. >more

WHY DO INDEX FUNDS HAVE MARKET POWER? QUANTIFYING FRICTIONS IN THE INDEX FUND MARKET
Zach Brown, Mark Egan, Jihye Jeon, Chuqing Jin, and Alex A. Wu
2024
The number of index funds increased drastically from 2000 to 2020, partially fueled by the emergence of exchange-traded funds (ETFs). Despite the growing availability of similar products, price dispersion persists, with many expensive funds still available, indicating significant market power among index funds. One explanation is that investor inertia limits the adoption of new products and interacts with other market frictions to restrict competition. To understand the sources and implications of market power, we develop a tractable quantitative dynamic model of demand for and supply of index funds that accounts for information frictions and heterogeneous preferences, in addition to inertia. These frictions on the demand side create market power for index fund managers, which fund managers can further exploit by price discriminating and charging higher expense ratios to retail investors. We find that inertia is high, with only 13% of households updating their portfolio at least once yearly. Although inertia is high, its impact on the investment behavior of households is limited because they struggle to optimize investment decisions due to information frictions. Thus, there is an interaction between the two frictions—inertia is more costly for investors when information frictions are low. We show that although the introduction of ETFs lowered expense ratios through both the cost advantage of ETFs and increased competition, demand-side frictions limited product adoption. >more