SWF Apologizes to Citizens for Merrill Lynch Investment

The head of South Korea’s $77 billion sovereign wealth fund has apologized to the country’s citizens for its disastrous $2 billion investment in Merrill Lynch, made shortly before the corporation merged with Bank of America.

“I believe that it was a poor investment and apologize to the people of Korea,” Hongchul Ahn, CEO of the Korea Investment Corporation (KIC), told reporters in a news conference Monday. “I promise that Korea Investment Corporation will remember the painful lesson from the Merrill Lynch investment and become a global sovereign wealth fund.”

Made in February, 2008, the $2 billion “special investment” was converted into Bank of America stock following the mid-crisis merger of the two financial giants. The assets had fallen in value by $720 million as of the end of October, 2014, according to KIC documents.

The investment will stay on KIC’s books for the time being, according to the regional Yonhap New Agency.

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“Task force research on Bank of America’s operation and financial sheets showed that it’s stock performance outlook is positive,” Ahn said.

He took over the board of directors and CEO position in December 2013, following a post-crisis period of swift turnover in the CIO position.

Investment managers who are highly averse to potential losses may be more likely to be terminated for underperformance, according to a study.

In a recent paper based on a survey of 68 managers, two academics concluded managers who are most averse to losses had a 39% higher probability of leaving the asset management industry than those who were more tolerant.

“Fund management companies may want to screen prospective managers on the degree of their loss aversion to ensure a better match between managerial decision making and a fund’s objectives,” wrote Andriy Bodnaruk of the University of Notre Dame and Andrei Simonov of Michigan State University.

The authors said despite the assumption that asset managers should be immune to behavioral biases, there was a considerable range of loss aversion with significant effects on funds’ downside risk and performance.

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More than a third of surveyed managers were highly averse to losses, 38% were in the middle, and 25% expressed more tolerance.

Those who invested most cautiously worked primarily in funds focused on capital preservation such as fixed income and balanced funds. Managers who were the least loss averse were positioned at funds that “pursued aggressive investment policies” like many hedge funds.

The study concluded downside beta was 0.18 higher for managers who were minimally loss averse. Risk-adjusted returns were also 1.16% to 2.11% lower per year for funds managed by those who are highly averse to losses.

Such underperformance translated to managers’ career success, the paper said. Some 36% of highly loss averse managers are likely to be terminated while only 5.9% of low loss-averse managers faced the same fate.

“The fund management companies respond to bad performance by firing underperforming managers and identify the source of managerial underperformance, i.e., high degree of their loss aversion,” the authors said.

Chances of termination were particularly great for funds “invested in the securities which value can fluctuate a lot over time,” versus fixed-income funds, according to the paper.

Read the full paper here.

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