Data and Research December 28, 2016

Great Recession Effect on Near-Retirees Modest

There were fewer near-retirees that lost their jobs than anticipated, and among those that did, there were offsets to wealth reduction, a study suggests.
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The effects of the Great Recession on retirement were more modest than the press and initial research suggested, according to a new study.

The more elaborate and detailed analysis by Alan L. Gustman, Department of Economics at Dartmouth College; Thomas L. Steinmeier, Department of Economics at Texas Tech University; and Nahid Tabatabai, Department of Economics at Dartmouth College suggests that previous studies did not obscure large offsetting effects from different influences. “To be sure, as we show those who lost their jobs due to the Great Recession paid a significant price. But there were fewer of them than were initially expected. In addition, housing prices are recovering, erasing a major source of decline in wealth,” the researchers write in their report.

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The largest overall effects of the Great Recession on full-time work by members of two-earner households are observed for 2009 and 2010. In 2009, an additional 2.5% of all 55- to 59-year-old husbands were not working full-time as result of the Great Recession, amounting to a reduction of 3.2% in full-time work. In 2010, 2.8% of 55- to 59-year-old husbands were not working full-time as a result of the Great Recession, amounting to a 3.8% reduction in full-time work.

For wives, the reductions in full-time work due to the Great Recession were 1.7% and 2.2% of those who initially held a job, or reductions of full-time work of 2.3% and 3%, respectively. For those ages 60 to 64, the reductions were 1.2% of men and 0.9% of women.

Most of these reductions were the direct result of additional layoffs during the Great Recession, which not only cost affected workers their jobs, but reduced their future earnings prospects should they continue in full-time work. Declines in the value of wealth due to the Great Recession increased the likelihood of full-time work, but this was substantially offset by the effect of decreases in expected returns, which reduced the likelihood of full-time work.

Having been laid off in the last three years reduces full-time work by 30%. There also are lingering effects of layoff on the probability of working longer. Having been laid off three or more years in the past reduces full-time employment in the current year by about 12%. This reflects the reduced work incentives for full-time work arising from lower earnings due to the loss of job tenure with a layoff as well as the additional earnings penalty from a layoff.

The effect of a spouse having been laid off on own work is much smaller. The reason is having one spouse not working increases the value of leisure for the other. In contrast, when one member of the household loses their job, the value of consumption increases relative to leisure. For recent layoffs, these effects are roughly offsetting, the researchers say. If a spouse was laid off more than three years ago, current full-time work effort is increased by around 2 to 3 percentage points. 

“On the whole, most of those nearing retirement at the outset of the Great Recession seem to have dodged a bullet,” the researchers conclude.

The report “  A Structural Analysis of the Effects of the Great Recession on Retirement and Working Longer by Members of Two-Earner Households” is available for purchase or a free download at http://www.nber.org/papers/w22984.

Investing December 28, 2016

Smart Beta Explains Institutional Asset Manager Outperformance

However, researchers identified an investment strategy that could have been used by investors in-house that would have resulted in similar returns.
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Using a dataset of $17 trillion of assets under management, researchers document that actively managed institutional accounts outperformed strategy benchmarks by 86 (42) basis points gross (net) during 2000 to 2012.

In return, asset managers collected $162 billion in fees per year for managing 29% of worldwide capital. Estimates from a Sharpe model imply that their outperformance comes from greater nuance in factor exposures (smart beta).

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Joseph Gerakos, from the Tuck School of Business at Dartmouth College; Adair Morse, from the University of California, Berkeley; and Juhani T. Linnainmaa, from the University of Southern California Marshall School of Business, obtained data for the 2000 to 2012 period from a global consultant that advises pension funds, endowments, and other institutional investors on the allocation of capital to asset managers.

In asset manager language, they explored the importance of smart beta or tactical factor allocations. They explain that the words smart and tactical refer to tilting portfolios toward toward better-performing factors. Their estimates tie positive performance directly to smart beta investing. They document that institutional asset managers outperformed strategy benchmarks by 42 basis points net of $162 billion in annual fees and that smart beta investing entirely explained this outperformance.

Researcher suggest that because the unit of observation in institution-level studies includes both delegated and non-delegated capital, an implication of the results is that non-delegated institutional capital likely underperforms delegated institutional capital. Furthermore, there are differences in asset classes covered. Most institution-level studies focus on the U.S. public equity asset class. In these results, U.S. public equities have the lowest positive alpha relative to strategy benchmarks.

NEXT: Is delegation to an asset manager worth the cost?

The results from the Sharpe analysis raise the question as to whether delegation to an asset manager was worth $162 billion per year. Could institutions have performed as well over the sample period by instead managing their assets in-house, assuming that they had the knowledge and ability to implement a factor portfolio?

The researchers consider the investment opportunity set of tradable indices that was available to institutions during the sample period, and find that if institutions had implemented dynamic, long-only mean-variance portfolios to obtain their within-asset class exposures, they would have obtained a similar Sharpe ratio as asset manager funds, taking into account trading and administrative costs.

This finding suggests that asset managers earned their fees at the margin. The researchers’ estimates also imply that the introduction of liquid, low-cost factor exchange-traded funds (ETFs) is likely eroding the comparative advantage of asset manager funds.

The data cover $18 trillion of annual assets on average over 2000 to 2012. The data include quarterly assets and client counts, monthly returns, and fee structures for 22,289 asset manager funds marketed by 3,272 asset manager firms. The median fund pools six clients and has $285 million in capital invested in a strategy. The analysis focuses on four asset classes: U.S. fixed income (21% of delegated institutional assets), global fixed income (27%), U.S. public equity (21%) and global public equities (31%). These asset classes represent the lion’s share of global invested capital. In these asset classes, researchers have close to the universe of institutional asset managers that were open to new investors during this period.

The report, “Asset Managers: Institutional Performance and Smart Betas” may be purchased or downloaded for free from http://www.nber.org/papers/w22982.

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