Inequality: Social and Ecological Research
Widening inequality: The Anatomy of the Global Saving Glut by Luis Bauluz, Filip Novokmet, and Moritz Schularick as of May 10th, 2022 (#25): “This paper has introduced a new international database on households’ asset portfolios, capital gains and saving flows … for the largest world economies since 1980 … . The data set provides cross-country series for “unveiled” indirect asset ownership through pension and investment funds. … housing capital gains obtained by the middle classes have been the main channel through which the middle-class wealth kept up with the top, and were the most critical factor moderating wealth inequality in recent decades. … we present evidence that the gap between the “haves” and “have-nots” in the global wealth distribution widened as wealth-to-income ratios stagnated or fell for the bottom 50% but surged in the upper half. Typically used inequality measures like top wealth shares or the Gini coefficient tend to overlook this dimension, as they mainly capture the dynamics within the ‘haves’ (e.g., the top-10% and the middle class). … we expose an increase in saving inequality in major world economies since the 1980s, manifested in rising saving at the top and falling saving in the rest of the distribution. … The increase in retained corporate earnings accrues to equity owning households at the top of the distribution” (p. 42). My comment: Wrong ESG bonus math? – Responsible Investments (Blog) (prof-soehnholz.com)
German wealth inequality: Wealth and Its Distribution in Germany, 1895-2018 by Thilo N. H. Albers, Charlotte Bartels, and Moritz Schularick as of May 10th, 2022 (#18) “… changes in the valuation of existing assets played a major role for changes in the wealth distribution over extended periods. … The equalizing collapse of business valuations during the Great Depression is a case in point, as is the recent real estate boom that lifted the fortunes of house owners. … For the past 70 years, the top 1% wealth share has fluctuated around its postwar level. … The main reason for the stability is that the middle-class made substantial gains in real estate wealth, thus mitigating concentration at the very top. However, a substantial part of the population does not own assets, and, hence, did not profit from rising stock or house prices altogether. … Between 1993 and 2018, the gap between the “haves” and the “have-nots” has widened significantly. In the lower half of the distribution, wealth has barely grown at all while both the top 10% and the 50-90% of households roughly doubled their wealth. As a consequence, a household in the top 10% of the wealth distribution is now 100 times richer, on average, than a household in the bottom half. 25 years ago, the gap was 50 times. … The improved estimates of business and housing wealth that we present in this paper result in a wealth-income ratio that is 120 percentage points higher than when estimated with the official data” (p. 36/37).
Amazon inequality: Megacompany employee churn meets 401(k) vesting schedules: A sabotage on workers’ retirement wealth by Samantha J. Prince as of March 10th, 2022 (#44): “Some employers, notably Amazon, deliberately churn employees to avoid a “march to mediocrity” by implementing appalling working conditions and policies that result in employees quitting. Additionally, the COVID-19 pandemic brought forth not just job losses but masses of voluntary resignations, particularly by lower-paid workers. When workers change jobs more frequently, they lose an ability to accumulate retirement wealth due in part to the use of disadvantageous, but legally permissible, 401(k) vesting schedules by a majority of America’s employers. Retirement wealth inequality and retirement security are issues that the United States has been grappling with for years. Low-paid and minority workers are directly impacted and suffer from these issues the most. This article shows that sizeable high turnover companies are abusing the system by using 401(k) plan vesting schedules to their own benefit and to worsen retirement wealth inequality” (abstract).
3 Scope 3s: Which Scope 3 Emissions Will the SEC Deem ‘Material’? by Kenji Watanabe and Umar Ashfaq of MSCI Research as of April 28th, 2022: “Three categories of Scope 3 emissions — purchased goods and services, use of sold products and investments — contributed over 70% of the total carbon footprint for constituents of the MSCI USA Investable Market Index. … The financed emissions could be contentious. Only 2% of financial-sector companies report this category as relevant, while estimates indicate that it accounts for the largest share of GHG emissions for the sector (92%)”.
Human tech stoppers: Smart Tech, Dumb Humans: The Perils of Scaling Household Technologies by Alec Brandon, Christopher M. Clapp, John A. List, Robert D. Metcalfe University, and Michael Price as of November 14th, 2021 (#47): “…. we find little to no evidence that the installation of a smart thermostat reduces household energy consumption on average. …. We believe that the discord between the results of our field experiment and the extant belief stems from the source of the latter: engineering studies that do not adequately account for how individuals use their smart devices” (p. 31).
ESG Investing Research
Neutral SRI performance: The Performance of Socially Responsible Investments: A Meta-Analysis by Lars Hornuf and Gül Yüksel as of May 22nd, 2022 (#118): “… we perform a meta-analysis to examine the performance of SRI, which … includes 153 studies and 1,047 observations of SRI performance. We find that, on average, SRI neither outperforms nor underperforms the respective market benchmarks. A reason for this finding could be that, according to modern portfolio theory, SRI should underperform the market portfolio, but increasing demand in recent years has had a positive effect on SRI performance, such that the net effect is no performance difference between SRI and the market portfolio. … high-quality publications, publications in finance journals, and authors who publish more frequently on SRI are all less likely to report SRI outperformance. … including more factors in a model reduces the likelihood that outperformance of SRI is found in studies that investigate stocks only” (S. 25/26). My comment: Verantwortungsvolle (ESG) Portfolios brauchen keine Outperformance – Responsible Investments (Blog) (prof-soehnholz.com) und Q1-2022 Performance: Relativ gute konsequent nachhaltige und passive Portfolios – Responsible Investments (Blog) (prof-soehnholz.com)
Pro tilting: Socially Responsible Divestment by Alex Edmans, Doron Levit, and Jan Schneemeier as of April 30th, 2022 (#674): “Blanket exclusion of “brown” stocks is seen as the best way to reduce their negative externalities, by starving them of capital and hindering their expansion. We show that a more effective strategy may be tilting — holding a brown stock if it is best-in-class, i.e. has taken a corrective action. While such holdings allow the firm to expand, they also encourage the corrective action” (abstract). My comment: I consider divestment + signaling more powerful than tilting + signaling, see Absolute and Relative Impact Investing and additionality – Responsible Investments (Blog) (prof-soehnholz.com) and Divestments bewirken mehr als Stimmrechtsausübungen oder Engagement | SpringerLink
Good bad mood? In the mood for sustainable funds? by Adrian Fernandez-Perez, Alexandre Garel and Ivan Indriawan as of May 3rd, 2022 (#32). “We find that a worse mood is associated with greater inflows to sustainable funds. This finding is consistent with greater risk aversion pushing investors to favor sustainable funds that they perceive as less risky” (abstract).
Passive and ESG Growth: Active, Passive, Retail, ESG and Value; Oh My! by Daniel Taylor, Ethan Gao and Aaditya Iyer of Man Group as of April 2022: “While the rise of passive has slowed over the last few years, we still believe it has room to grow; 30% does not seem like an upper limit, practically or theoretically, to passive market share. It is difficult to predict what will happen to retail, though it is unlikely that the more speculative components can survive indefinitely. … ESG … will continue to evolve at a rapid pace … up to this point, it is not obvious that the advent of ESG has had a material impact on asset pricing …” (p. 12).
Traditional Investing Research (Inequality)
Bad efficiency? The failure of market efficiency by William Magnuson as of April 30th, 2022 (#60): “Recent years have witnessed the near total triumph of market efficiency as a regulatory goal. … There is strong evidence that, at least on some metrics, our capital markets are indeed more efficient than they have ever been. …. By focusing our attention narrowly on economic efficiency concerns—such as competition, friction, and transaction costs—we have lost sight of other, deeper values within our economic system, including wider conceptions of duty, fairness, and morality. … New market structures and technologies, from special purpose acquisition companies to social-media oriented trading apps to cryptocurrencies, have emerged to eliminate barriers to trade and compete with institutional incumbents. These strategies may well lead to more efficient markets in so much as they facilitate access to capital, but they also have the side effect of placing unsophisticated regular citizens into complex contractual arrangements with sophisticated market actors. The result is an “efficient” market, but one with steep moral and social costs. This Article examines the limits of market efficiency as a regulatory goal and suggests a set of structural and substantive reforms aimed at better balancing efficiency with the other goals of markets” (abstract).
Buffett crisis tool: The Buffett Indicator: International Evidence by Laurens Swinkels and Thomas S. Umlauft as of May 1st, 2022 (#511): “… the market value of equities scaled by gross domestic product possesses statistically significant forecast properties for long-term equity returns … The relationship between the market value of equity and economic output is a crude, but straight-forward way of measuring the degree of resources directed to capital markets vis-à-vis the ‘real’ economy. MVE/GDP can thus be viewed as a yardstick to investor sentiment towards stock markets and, by logical extension, towards financial assets in general. … The metric possesses strong and robust predictive properties over longer horizons (c. ten years), as market valuations relative to economic output have tended to mean-revert to a long-term equilibrium since 1973, although the latter half of the observation period has witnessed higher MVE/GDP ratios than the period until the turn of the millennium” (p. 21).
Bad Market Timing: Discounting Market Timing Strategies by Toomas Laarits as of April 8th, 2022 (#47): “I show that a number of previously documented market timing strategies with high alphas with respect to standard factor models tend to exhibit variance ratios substantially above one at longer horizons, along with lower alphas with respect to popular factor models, and lower Sharpe ratios. Hence such timing strategies are much less appealing from the perspective of a long-term investor than might first appear” (p. 17). My comment: Einfaches Risikomanagement kann erstaunlich gut funktionieren – Responsible Investments (Blog) (prof-soehnholz.com)
Sellingskills: Fund Manager Skill: Selling Matters More! By Onur Kemal Tosun, Liang Jin, Richard Taffler and Arman Eshraghi as of April 29th, 2022 (#8): “Our key finding is that fund managers with superior selling ability are significantly better at buying stocks and, as a result, earn significantly higher aggregate returns. However, fund managers who buy stocks successfully do not necessarily have parallel selling skills, leading to lower returns overall. Thus, we provide strong evidence that selling skill is the key determinant of overall mutual fund timing performance” (abstract). … “Even for professional investors sell decisions are particularly difficult“ (p. 20).
Sharpe fund power: Mutual Fund Selection and the Investment Horizon by Moshe Levy as of May 2nd (#6): “Mutual fund investors typically invest for years, or even decades. In contrast, fund rankings are almost invariably based on monthly return parameters. This is a potentially severe problem, because rankings are not invariant to the horizon. … This paper shows … that as the horizon increases the efficient investment set rapidly shrinks towards the fund with the maximal monthly Sharpe ratio. Thus, perhaps surprisingly, monthly Sharpe ratios turn out to be the appropriate performance measure for long-run investors” (abstract).
Fintechlimits: Unfulfilled promises of the fintech revolution by Lindsay Sain Jones amd Goldburn P. Maynard, Jr. a of April 29th, 2022 (#135): “Racial wealth inequality is complex. … lack of access to credit and financial services, lower rates of return, and discrimination have contributed to this persistent gap. … key players in the industry promote fintech as a primary means to advance financial inclusion for minorities. … we have yet to see these technologies employed to significantly address the underlying causes of the wealth gap. Further, in some instances, fintech may exacerbate existing inequalities” (abstract).