THE SPILLOVER, RISK AND LEVERAGE EFFECTS OF SMART BETA MANAGEMENT EXCHANGE-TRADED FUND (ETF)

This research uses two different GARCH models to measure spillover, risk, and leverage effects of active, passive, and smart beta management Exchange-traded Funds (ETFs). The increase in popularity of ETFs and new categories within them, specifically the growth of smart beta management, means asset managers and investors have new metrics to account for when determining portfolio exposure following the Adaptive Investment Approach (AIA). The results show significant relationships among all groups regarding the spillover. A trend of positive multi-lateral spillover of returns among the three management types including passive, active and small beta is observed with smart beta showing the highest percentage of a bi-lateral positive effect. The strongest spillover of volatility effects is among the actively managed ETFs. The testing of risk results is insignificant, but the leverage effect results are consistent with the past studies showing the significant negative bi-lateral effect.

ESG Materiality

Sustainable finance proponents argue that integrating environmental, social, and governance (ESG) factors into investment decisions should have a positive long-term material impact on financial performance and ultimately benefit wider society as a whole. This chapter is based on interviews and an ESG materiality survey that was run among 20 prominent South African asset managers. The results demonstrate that if there is a growing awareness of ESG factors among the respondents, there are some perceived tensions around how to practically embed ESG factors within investment processes. In addition, the results show that the integration of ESG factors into financial valuation are not yet mainstream and that more needs to be done to demonstrate how the integration of ESG factors within investment processes materially impacts financial performance and meanwhile contributes to the sustainable development of economies.

Risk-Cost Optimized Maintenance Strategy for Steel Bridge Subjected to Deterioration

This paper aims to develop a deteriorated bridge maintenance strategy that ensures the safe operation of steel structures and minimizes the total risk. Five common failure modes are considered for the deteriorated bridge: flexure, shear, deflection, fatigue failure for girder, and chloride attack for the concrete deck. Time-dependent and system reliability analyses are carried out to find the probability of failure under these failure modes. Risk-cost optimization is then used to determine the maintenance strategy. This method was applied to a working example. It was found that the developed maintenance strategy can predict when, where, and what to maintain for a bridge to ensure its safe and serviceable operation during its lifespan. The proposed methodology can help structural engineers and asset managers repair and maintain bridges under deterioration.

Has Diamond Grinding Been A Cost Effective Pavement Preservation Treatment In Australia?

Australia introduced conventional longitudinal diamond grinding of highway concrete pavements in 2009 with the purchase of two "4‐foot" highway grinding machines by two contractors. The availability of these machines in Australia has enabled contractors to improve ride quality of new pavements, rather than accept a deduction to the tendered rate for the supply and placement of concrete pavement. Grinding of new concrete base is permitted up to an IRI of 3.5 m/km, thereby reducing the need to remove and replace concrete pavement which met the specified thickness, strength and density, but not ride quality. More importantly, with the introduction of the grinding machines, asset managers have the opportunity to use diamond grinding to treat existing concrete pavements that have a rough ride, or when the textured surface no longer meets specified levels for skid resistance. Although the primary use of diamond grinding was to improve ride quality of new and existing concrete pavements, it has also been used to: treat stepping across transverse contraction joints in PCP, improve skid resistance at roundabouts, improve both ride quality and texture for JRCP pavements (greater than 40 years of age) with a thin wearing course and spalling in the asphalt at transverse joints. The above treatments to concrete pavement allow asset preservation and avoid high reconstruction costs. The Austroads concrete pavement design procedure is based on the PCA design method and road smoothness is not a design parameter, unlike the USA approach to concrete pavement design where ride quality is a design input. There is still much work to be done to convince asset managers in Australia that the removal of the high areas of a concrete pavement to smooth the surface, reduces the dynamic wheel loading and minimises accumulated fatigue stress in the concrete. This paper reviews the last 10 years of diamond grinding projects and the success of this pavement preservation treatment for new and existing urban and rural concrete pavements in Australia. Recommendations to reduce the cost of diamond grinding concrete pavements and extend the use of this treatment are also provided.

Impact of financial development on bank profitability

PurposeThis paper investigates the effect of financial development on bank profitability. The authors examine whether financial development is an important determinant of bank profitability.Design/methodology/approachThe ordinary least square and the generalized method of moments regression methods were used to analyze the impact of financial development on the profitability of the Nigerian banking sector.FindingsThe authors find a significant negative relationship between the financial system deposits to GDP ratio and the non-interest income of Nigerian banks. This indicates that higher financial system deposits to GDP depresses the non-interest income of Nigerian banks. The result implies that the larger the size of the Nigerian financial system, the lower the profitability of banks in Nigeria. Also, the authors observe that bank concentration, nonperforming loans, cost efficiency and the level of inflation are significant determinants of the profitability of Nigerian banks.Practical implicationsIt is recommended that regulators should establish market-enabling policies that encourage new banks to emerge in the banking industry. The entry of new banks can lead to increase in financial system deposits and credit supply for economic growth. Regulators also need to understand the role of Nigerian banks in promoting financial development and find ways to collaborate with banks towards financial sector development. Another implication of the findings for asset managers is that asset managers will need to take into account the prevailing level of financial development, particularly the size of the financial system, in their asset pricing and investment decisions. This will ensure that investors get value for their investments in Nigeria. The financial implication of the study is that the level of financial development in Nigeria can improve the finance-growth linkages in Nigeria through the efficient allocation of credit and capital to crucial sectors of the Nigerian economy to spur growth in those sectors.Originality/valueEvidence dealing with how financial development affects the profitability of the banking sector in African countries is scarce in the literature, and is completely absent for Nigeria. This paper addresses this research gap.

Business Model of Sustainable Robo-Advisors: Empirical Insights for Practical Implementation

The given research paper examines the characteristics of German private investors regarding the probability of using robo-advisory-services. The used data set was gathered for this purpose (N = 305) to address the research question by using a logistic regression approach. The presented logit regression model results indicate that the awareness of sustainable aspects make a significant difference in the probability of using a sustainable robo-service. Additionally, our findings show that being male and cost-aware are positively associated with the use of a sustainable robo-advisor. Furthermore, the probability of use is 1.53 times higher among young and experienced investors. The findings in this paper provide relevant research findings for banks, asset managers, FinTechs, policy makers and financial practitioners to increase the adoption rate of robo-advice by introducing a sustainable offering.

The Increasing Importance of Environmental, Social and Governance (ESG) Investing in Combating Climate Change

The current climate change is significantly caused by anthropogenic greenhouse gases, particularly CO2 released by burning of fossil fuels. Climate change is predicted to disrupt production systems and supply chains of businesses, potentially affecting their financial performance. ESG investing, the consideration of environmental, social and governance factors by asset managers will likely play a crucial role in combating climate change. To attract ESG funds, companies will have to reduce their carbon footprint, among other actions. When companies reduce scope emissions, they help achieve a goal of the Paris Agreement of limiting average global temperature increase to below 2°C above pre-industrial level. The aim is to identify factors that are likely to increase uptake of ESG investing. The increase in number of ESG investors and their assets, higher financial performance of ESG-linked investments, and increasing regulatory and investor initiatives are likely to increase the impact of ESG investing in reducing greenhouse gas emissions. In addition, investors are becoming more environmentally conscious when making investment decisions. Although some challenges persist, including inconsistency in terminology, huge amount of data to analyze and heterogenous rating standards, ESG investing is likely to play an important role in influencing entities to reduce their carbon footprint.

Wolf Pack Activism

Blockholder monitoring is central to corporate governance, but blockholders large enough to exercise significant unilateral influence are rare. Mechanisms that enable moderately sized blockholders to exert collective influence are therefore important. Existing theory suggests that engagement by moderately sized blockholders is unlikely, especially when the blocks are held by delegated asset managers who have limited skin in the game. We present a model in which multiple delegated blockholders engage target management in parallel, that is, “wolf pack activism.” Delegation reduces skin in the game, which decreases incentives for engagement. However, it also induces competition over investor capital (i.e., competition for flow). We show that this increases engagement incentives and helps ameliorate the problem of insufficient engagement, although it can also foster excess engagement. Under competition for flow, the total amount of capital seeking skilled activist managers is relevant to engagement incentives, which helps to predict when and where wolf packs arise. Flow incentives are particularly valuable in incentivizing engagement by packs with smaller members. This paper was accepted by Gustavo Manso, finance.