Investment behaviour of German equity fund managers : an exploratory analysis of survey data

In order to shed light on the "black box" of institutional equity investing in a systematic manner, I conducted a broadly based questionnaire which received a large response from German mutual fund companies. The survey asked fund managers for their basic views and practices and for insights into their company's performance-measurement and compensation incentives. It was possible to identify three core types of investors, labelled fundamentalists, tacticians and methodologists, in the data on investment behaviour. Common to all types is the primary aim of achieving above-average returns on investment with due allowance being made for sluggishness in the reaction of market prices to new information. Another universal feature of institutional equity investing turns out to be a heavy reliance on information sources which offer a means of confirmation and through which the contagions of fear and exuberance may be transmitted. In general fund managers exhibit a pronounced preference for "winner-type" and "spotlight" stocks as well. All investor groups recognise, in the first instance, underlying economic information as a source of superior value. However, a potential for exaggerated market dynamics is suggested by the fact that the mere arrival of news from corporations or analysts' earnings revisions is generally thought to impart as strong a market impulse as the perceived mispricing of stocks relative to the market or sector as such. Furthermore, those who appear to be best suited to conduct fundamental arbitrage are nevertheless likely to be constrained, to a significant extent, by time horizons and the fear of market movements. Besides investment focus and basic attitudes towards market efficiency, agency problems are shown to have a bearing on equity fund managers' investment behaviour.