This year’s top 10 stories included a peek into AustralianSuper’s international equities build out in London, AMP’s move to slash employee benefits, and plenty of hard-hitting analysis of the issues that matter in institutional investment. But the real story is how readers helped shape all of that coverage.
Orbis’ Stuart Place is riding from Melbourne to the Moon and Back to fund a treatment for the “monster of a disease” that his youngest son was born with. The investment industry is rallying behind him.
Bad weather makes better investors: study
Every cloud has a silver lining. In the case of literal rain clouds, it might well be positive returns.
Bad weather might lead to better returns, if the findings of a recent study of institutional investor behaviours are to be believed. Lei Zhang, associate professor at the City University of Hong Kong, studied a cross-section of US-based institutional investors between 1999 and 2019 and found that rainy days might well turn some managers into rainmakers.
Zhang examined two hypotheses: the negative mood hypothesis and the productivity increase hypothesis. It’s taken as a given that bad weather impacts our mood, and previous studies have found that it can impact everything from selling behaviour to responsiveness to earnings reports. But bad weather can also focus the mind of institutional investment managers away from their usual leisure activities of polo and golf.
“Apparently, distracting thoughts related to salient outdoor options come to mind much more easily on good weather days than on bad weather days,” Zhang wrote in the study, titled “Rainmakers: Bad Weather and Institutional Investor Performance. “For example, people will not make plans to go hiking or play golf on a rainy day.”
“Consequently, with less distraction, individuals will be more focused and exert more attention and effort in their work, and therefore perform their tasks more productively on bad weather days.”
To test his hypotheses, Zhang obtained the locations of the headquarters of asset managers and monthly county-level weather conditions, focusing on precipitation as the primary indicator of bad weather “because it is the most critical barrier to outdoor physical activities.”
“The results confirm the univariate findings that bad weather experienced by institutional investors leads to better buy-and-hold portfolio performance in the next quarter,” Zhang wrote. “This relationship holds across different specifications, controlling for investor types, investment styles, and investor locations, and becomes slightly stronger with the inclusion of investor fixed effects.”
“We find that the bad weather indicator is associated with a 27 bps increase in portfolio performance per quarter in terms of raw excess return minus the risk-free rate.”
Zhang also noted that the productivity increase was marked among investors “that are supposed to devote more attention and effort to stock-picking and fundamental research to exploit temporary stock mis-valuations” and that performance was generally higher for newly bought stocks than newly sold ones during the period of bad weather. There was also a positive relationship between access intensity of the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system and bad weather, suggesting institutional investors do more research on rainy days.
“The results further show that only bad weather ownership is positively associated with the relative intensity of accessing insider trading filings, whereas the relationship with good weather ownership is generally negative, suggesting that good weather may even reduce the capacity of asset managers to spend time on examining insider trading filings,” Zhang wrote.
“Overall, these results for the EDGAR accessing intensity of corporate filings corroborate the productivity increase hypothesis, i.e., bad weather increases the cognitive capacity of asset managers to collect and process information, especially for previously unfamiliar non-local stocks, leading to more skilful portfolio selection decisions and better investment performance.”
Which all raises the question of what exactly these guys are doing when it isn’t raining.
