To Reduce Risk, Unfriend Your Manager | Chief Investment Officer

Is your fixed income fund manager constantly tweeting? Does your equities manager post daily items on LinkedIn? Then it might be time to take a closer look at the risks they are taking with your portfolio, new research has claimed.

Eugene Chan from the University of Technology in Sydney and Najam Saqib from Qatar University have published a paper examining how the use of social media affects the risk investors take.

“We propose that using online social networking sites increases users’ financial risk-taking,” the paper claimed. “We draw on the cushion hypothesis and social capital theory to make our prediction.”

“We propose that using online social networking sites increases users’ financial risk-taking.” — Chan & SaqibThe cushion theory is based on evidence from “collective” East Asian societies, the authors said, and defines a feeling of safety when taking financial risks. These collectives are recreated online through social media, but unlike in real life, offer no actual support—especially regarding taking financial decisions.

The authors also said that unlike offline, where relationships take a relatively long time to build, an online “society” is created quickly and includes people who would not normally be relied upon for financial assistance.

The paper reported on three different studies conducted by the authors using sample investors who all used Facebook split into two groups. In each experiment, one of the groups spent five minutes on the social networking site before performing a set investment-based task, while the others spent the same time before the task on a news channel.

“Across three studies, we find that online social networking increases users’ financial risk-taking,” the authors said. However, there were differences in the effects these networks—and the quality in terms of the closeness of who was linked to whom—had on investment decisions.

Sample candidates were drawn uniquely from the US, which does not function as a collective society, the authors said. But, they warned, investors who already experience such a society offline, in countries found in East Asia for example, could be prone to an even more accentuated increase in risk-taking.

The authors intend to conduct similar experiments with other social networking channels, and said blogs and even eBay had a “cushioning” effect that led to greater risk-taking.

In April, Chan published a paper examining how the presence of perceived good-looking men could stimulate extra risk-taking in male colleagues. Chan’s research is conducted on the behaviours of individuals, although evidence suggests all categories of market participants are prone to the same biases.

Both papers can be purchased on the Science Direct website.

Related Content: Untapped Alpha: People & How Attractive Are Your Managers?

Demand for infrastructure investments is driving down the potential returns pension funds can expect from the asset class, according to research by Cerulli Associates.

Nearly 70% of European pension funds surveyed by Cerulli indicated that they wanted to increase exposure to infrastructure assets in the next three to five years, in a bid to diversify away from expensive core assets such as equities and fixed income.

“What is going on at the heart of many institutions’ portfolios is saving, not investing.” —Cerulli Associates.But the group’s report—“European Institutional Dynamics 2015”—indicated that limited supply combined with demanding new rules for some investors meant allocating to alternative asset classes was not straightforward.

Demand for infrastructure has pushed valuations significantly higher: Dow Jones’ Brookfield Global Infrastructure Composite index of listed infrastructure companies rose 28% in the past 12 months according to Bloomberg.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

As well as a lack of assets, Cerulli also cited impending Solvency II rules for insurance companies as a potential problem for both investors and asset managers. The rules will require insurers to hold more capital to back certain investments, particularly those perceived to be more risky. In addition, such investments will require more detailed and more regular reporting.

However, Cerulli’s research reported that fees were less likely to deter institutions from investing. The report said the cost of investing in alternative assets “only rank mid-pack” on the list of things to consider. “Risk management is more important,” the report said.

The research also warned against investors hoarding cash or “safe haven” government bonds as prices rose and yields dropped.

“Even a cursory glance at core debt yields shows that what is going on at the heart of many institutions’ portfolios is saving, not investing,” Cerulli’s report stated. “This endangers long-term returns, while negative rates/yields even endanger the returns of short-term deposits.”

The yield on Germany’s two-year government bonds has fallen into negative territory over the past 12 months to -0.22%, while five-year German bonds yield only 0.05%, according to Bloomberg data. Laura D’Ippolito, senior analyst at Cerulli, said investors should look—and many are looking—to diversify into alternative areas of fixed income “such as emerging market debt, bank loans, and credit”.