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1st 3 topics
Important concepts:
1.
2.
Fiduciary duties
General care and loyalty
Putting clients interest first
Treating all clients equally
Full disclosure of investment risk
Avoid conflicts of interest
Acting in good faith
Reasonable basis for investment advice
Seeking best execution for client trades
Memorize and know to calculate 3 formulas:
a. Beta: covar (Ri,Rm) / market volatility squared
b. Expected return = rf + (beta * rm rf)
c. Sharpe ratio = [E(r) rf ] / std dev of returns
d. See HW #1 canvas
3. Required readings last
Socially Responsible Investing (SRI)
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Fiduciary
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Opinion letter, Robert Doyle- says ERISA managers may invest in SRI if they
find risk and return is competitive with available alternatives- must document
analysis of risk/reward comparison
Charitable boards
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Not official gov regulation but attitude: Charitable boards might have a
duty to consider SRI
In order to fulfill the responsibility to see the NGO meets its charitable
purposes, board members may have a duty to consider whether their
investments will further those purposes, or at least not run counter to them
(i.e. American Cancer Asosciation invest tobacco?)
ON EXAM: # SRI funds over time increased more than 10X between
1990 (20 funds) and 2014 (190 funds)
Note: leading ESG criteria are Governance, Sudan, ~200, then
Tobacco/Alcohol ~150, then Human rights, labor, military/weapons, gambling,
social, environmental ~100
Exam wont go into great detail for indices- thats more homework
But know different between SRI and normal index
Ex. MSCI KLD 400 Social Index (Aka Domini 400 Social Index) created by Amy
domini, designed to mimic S&P500 except with SRI screens
Professors paper: Is there a Cost for SRI?
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Work looked only at mutual funds: how do you measure and analyze the cost
of SRI investing in mutual funds?
Couple topics:
Does the investor base their investment decision on prior track record
(alpha-creating managers)? The study found that the cost is a lot
higher when the investor does so
o 2nd way costs were found to be large was if the investor wanted a style
or factor tilt
Study looked at 4 factors: remember Profs lecture on Fama
French 3 factor model: momentum (MOM), growth (SMB),
value(HML), and MKT
But, Morningstar ratings show SRI funds are higher rated
than non-SRI
o EXAM: Study finds cost of SRI vs normal investing is relatively
insignificant unless the investor 1) wants a manager who
delivers alpha 2) wants style tilts or factors
o Re-read the Geczy study abstract + conclusions, no formulas,
understand what they were looking for and results, not great
detail
Summary: difference between expected costs of SRI vs non SRI (1.1
vs 1.3 expense ratio) is not large in Geczy study
o
Dept of Labor in 2011 found pension fund proxy voting often unrelated to
economic benefits for plan beneficiaries
Larcker & Tayan argue that CalPERS and AFL-CIO provide little analysis
showing how proxy voting benefits the pension plan beneficiaries
Summary: US Dept of Labor is clear that using the pension funds
ownership position in a firm for advocacy purposes without proof of
economic benefit for the fund beneficiaries (pensioners) is a
violation of ERISA
Shareholder Activism information from Brandon Rees talk
Rees (AFL-CIO) Rebuttal to Larcker & Tayans critique of
Shareholder Activism
o Dept of Labor says you can be a shareholder activist with a
reasonable expectation that activism will enhance the economic value
of the plans investment in the corporation, after costs, and every
AFL-CIO shareholder resolution contains this analysis and statement
explaining how it will benefit economic interests
o CalPERS is actually run by the State of CA, not by unions
o Larcker & Tayan argue that AFL-CIO targeted Comcast because it was
resisting unionization, but AFL-CIO responded that Comcast was
targeted due to poor governance and depressed stock price
Research shows positive abnormal returns for companies engaged by
activists
Reading Active ownership not on exam, just know CSR activities, if
successful, create a positive abnormal return, but no effect if unsuccessful
EXAM: Question: Occupy Wall Street is this a form of socially
responsible shareholder activism, just without the shares? Some
success in changing management decisions?
Gadflies have greatest % of shareholder proposals (33%), but many are junkthe ones that really count are labor unions, religious, think tanks/institutions
Biggest % of shareholder proposals by type are 1) Environmental
2)Political spending/lobbying
18% success rates for SRI activist engagements vs. 4060% success rates for hedge funds financial activist
engagements
Conclude: CSR activism improves social welfare: increases
shareholder value when engagements succeed but
doesnt destroy value when engagements are
unsuccessful
Reading list:
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