Professor David Gallagher

Aitken, M., Chappel, N., Evans, J., Frino, A., Gallagher, D.R. & Ralston, D. 2003, A review of the Australian financial services industry, 1st, Business Excellence Australia, Australia.

Gallagher, D.R. 2007, 'The role of index funds in retirement asset allocation' in H. Bateman (eds), Retirement Provision in Scary Markets, Edward Elgar, USA, pp. 55-77.

Chan, H., Faff, R.W., Gallagher, D.R. & Looi, A. 2009, 'Fund size, fund flow, transaction costs and performance: Size matters', Australian Journal of Management, vol. 34, no. 1, pp. 73-96.
View description>>

Recent studies find evidence that small funds outperform large funds. This fund size effect is commonly hypothesized to be caused by transaction costs. Due to the lack of transactions data, prior studies have investigated the transaction costs theory indirectly. Our study, however, analyses the daily transactions of active Australian equity managers and finds aggregate market impact costs incurred by large managers are significantly greater than those incurred by small managers. Furthermore, we show large managers exhibit preferences for trade package formation and portfolio characteristics consistent with transaction cost intimidation. We analyse the interaction between transaction cost intimidation and the fund size effect, and document that large managers pursuing a highly active trading strategy suffer more from fund size, than large funds following a more passive strategy. This suggests the fund size effect is related to transaction costs, as trading activity is a good proxy for expected market impact. Finally, based on a simulation experiment, we find that transaction cost intimidation is at least as important as the increase in market impact costs due to fund size.

Fong, K., Gallagher, D.R., Lau, S. & Swan, P.L. 2009, 'Do active fund managers care about capital gains tax efficiency?', Pacific-Basin Finance Journal, vol. 17, no. 2, pp. 251-270.
View/Download from: Publisher's site
View description>>

This study investigates the tax efficiency of actively managed equity funds by conducting a previously unaddressed natural experiment. Specifically, we examine whether asset sales were timed to take advantage of the introduction of a substantial discount to realized capital gains when the holding period was at least 1 year. Institutional equity fund management in Australia is principally focused on the pre-fee and pre-tax performance surveys of leading asset consultants. Given this industry setting, our study is important because tax efficiency is not accounted for directly in the reported performance numbers, and is thus opaque. We find that active fund managers overall have significantly increased the proportion of long-term capital gains realized after the change in taxation code, although there are significant variations across funds. We also find that active fund managers realize more long-term gains on both large capitalization and low volatility stocks.

Fong, K., Gallagher, D.R. & Lee, A.D. 2009, 'The value of alpha forecasts in portfolio construction', Australian Journal of Management, vol. 34, no. 1, pp. 97-121.
View description>>

This study examines a portfolio strategy which selects stocks using the undisclosed monthly holdings of Australian active fund managers. When considering a large range of strategies incorporating fund portfolio holdings information, the top performing strategies are robust to data snooping and are both statistically significant and economically significant when incorporating transaction costs. These strategies are short term in nature, with statistically significant performance lasting up to nine months. When we account for look-ahead bias in the formation of a strategy, we find statistically significant alpha when following the best performing strategy holding 20 stocks or more in the previous month.

Ainsworth, A., Fong, K. & Gallagher, D.R. 2008, 'Style drift and portfolio management for active Australian equity funds', Australian Journal of Management, vol. 32, no. 3, pp. 387-418.
View description>>

Using monthly active equity fund portfolio holdings, we examine the magnitude of style drift and decompose it into active and passive components. We find that while fund style tilts are consistent with their self-stated investment objective, there is variation in the degree of style bias within style groups. We document that funds actively adjust their portfolio holdings in response to passive style drift to retain a desired portfolio tilt. The degree of adjustment varies with the frequency over which the drift is measured, with funds being most responsive to changes in book-to-market and momentum drift. We also find that certain types of style drift affect portfolio turnover.

Fong, K., Gallagher, D.R. & Lee, A.D. 2008, 'Benchmarking benchmarks: Measuring characteristic selectivity using equity portfolio holdings data', Accounting and Finance, vol. 48, no. 5, pp. 761-781.
View/Download from: Publisher's site
View description>>

This research was funded through an Australian Research Council Linkage Grant (LP0561160) involving Vanguard Investments Australia and Securities Industry Research Centre of Asia-Pacific. We are grateful for the helpful comments from a number of individuals, including an anonymous referee, Doug Foster, Eric Smith, Scott Lawrence and seminar participants at the 19th Australasian Banking & Finance Conference (2006), and the 20th University of Western Australia PhD Conference in Economics and Business (2007). The authors thank Vanguard Investments Australia for research support. The authors also thank the organizers of the 12th Annual Super Bowl of Indexing held in Scottsdale, Arizona, USA (2007), where this paper won the William F. Sharpe Award for best index-related research paper.

Fong, K., Gallagher, D.R. & Lee, A.D. 2008, 'The state of origin of Australian equity: Does active fund manager location matter?', Australian Journal of Management, vol. 32, no. 3, pp. 503-523.
View description>>

We examine the relation of active equity fund managers' location proximity to a stock's headquarter and fund managers' stock selection skill and investment behaviour using a representative sample of Australian institutional equity funds. Contrary to the findings of much international research, our study reveals evidence which is inconsistent with a location advantage for Melbourne and Sydney active equity funds. Both Melbourne and Sydney fund managers overweight Melbourne stocks, exhibit skill in picking Sydney stocks and avoid poor performing Melbourne and Sydney stocks. In addition, we find no evidence of word-of-mouth trading effects in Melbourne or Sydney funds. Taken together, this suggests information asymmetries arising from location are weak for Melbourne and Sydney funds.

Ainsworth, A., Gallagher, D.R. & Gardner, P. 2007, 'Performance evaluation and the potential biases in fund manager return databases', JASSA, vol. Winter, pp. 21-27.

Dishi, E., Gallagher, D.R. & Parwada, J.T. 2007, 'Institutional investment flows and the determinants of top fund manager turnover', Accounting and Finance, vol. 47, no. 2, pp. 243-266.
View/Download from: Publisher's site
View description>>

This study examines how the termination of superannuation investment mandates contributes to the departure of top fund managers in companies delegated the portfolio management role. Terminations of superannuation plan mandates increase the probability of a fund company changing the responsible fund manager. Objective-adjusted returns are also significant managerial turnover considerations. These results illustrate that significant losses of superannuation fund clients act as an external control mechanism in the investment management industry that complements internal managerial performance measures.

Fong, K., Gallagher, D.R. & Lee, A.D. 2007, 'Where Do Australian Active Equity Managers Outperform?', JASSA, vol. Summer, no. 1, pp. 5-10.
View/Download from: UTSiResearch
View description>>

The appropriateness of benchmarks is particularly critical in performance evaluations of equity managers, and inferences made from them in terms of managerial skill Recent empirical research for Australian equity managers shows, on average, outperformance relative to the market over long-run periods. This paper aims to identify more accurately the main sources of that excess return, and finds that it stems from a combination of style exposures and stock selection, both primarily within the large-cap arena especially bank and finance stocks.

Brands, S., Gallagher, D.R. & Looi, A. 2006, 'Active investment manager portfolios and preferences for stock characteristics', Accounting and Finance, vol. 46, no. 2, pp. 169-190.
View/Download from: Publisher's site
View description>>

The present study investigates the stock characteristic preferences of institutional Australian equity managers. In aggregate we find that active managers exhibit preferences for stocks exhibiting high-price variance, large market capitalization, low transaction costs, value-oriented characteristics, greater levels of analyst coverage and lower variability in analyst earnings forecasts. We observe stronger preferences for higher volatility, value stocks and wider analyst coverage among smaller stocks. We also find that smaller investment managers prefer securities with higher market capitalization and analyst coverage (including low variation in the forecasts of these analysts). We also document that industry effects play an important role in portfolio construction.

Brands, S., Brown, S. & Gallagher, D.R. 2006, 'Portfolio concentration and investment manager performance', International Review of Finance, vol. 5, no. 3-4, pp. 149-174.
View/Download from: Publisher's site
View description>>

This study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process ? stock selection skill and portfolio management. Our study documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find that more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions that are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300.

Frino, A., Gallagher, D.R. & Oetomo, T. 2006, 'Further analysis of the liquidity and information components of institutional orders: Active versus passive funds', Pacific-Basin Finance Journal, vol. 14, no. 5, pp. 439-452.
View/Download from: Publisher's site
View description>>

Previous research examining the price impact of institutional trading concludes that index funds incur higher liquidity costs due to the higher demand for trading immediacy. However, this conclusion has only been inferred by comparing the total price impact of active and index funds. This study extends the literature by decomposing the price impact of both active and index funds' trades into liquidity (temporary) and information (permanent) components. Index fund trades incur higher liquidity costs and generate lower returns than active funds' trades. Indeed, the evidence presented in this study reveals the execution costs of index funds' trades are entirely liquidity-driven.

Gallagher, D.R. & Pinnuck, M. 2006, 'Seasonality in fund performance: An examination of the portfolio holdings and trades of investment managers', Journal of Business Finance & Accounting, vol. 33, no. 7-8, pp. 1240-1266.
View/Download from: Publisher's site
View description>>

This study examines the extent to which seasonal variation arises across calendar months in the performance of active Australian equity managers. While it is well documented that there is seasonality in equity market returns, it is unknown whether calendar month variation in managed fund performance exists. Employing a unique database of monthly stock holdings, we find evidence consistent with systematic variation in the risk-adjusted performance of active investment managers over the calendar year. Specifically, we find fund performance is higher in the months when corporate earnings are announced. We also document that the performance of fund managers is lower in the months preceding the tax year-end. Finally, we report evidence that investment manager performance is greater than normal in December, possibly due to both window dressing and the Christmas holiday effect. These findings have important implications for investors attempting to exploit anomalies in fund returns by timing their entry and exit points from active equity funds

Gallagher, D.R. & Gardner, P. 2006, 'The implications of blending specialist active equity fund management', The Journal of Asset Management, vol. 7, no. 1, pp. 31-48.
View description>>

Employing a database of equity portfolio holdings for active US equity fund managers, this research provides a simulation analysis of the various portfolio blends as additional active equity funds are added to a single portfolio structure (ie a manager-of-managers arrangement). This analysis is particularly important given the significance of manager selection and portfolio configuration to pension funds. A significant erosion in the active bets of stocks held in blended portfolios is documented. The research also identifies a potentially significant efficiency problem for blended portfolios, where up to 15 per cent of stock trading in any quarter is executed between common equity fund managers for a ten-fund portfolio case. As expected, this effect is amplified when an analysis is performed at the industry level. Improved efficiencies in active portfolio design would most likely be achieved where a centralised decision maker is permitted to construct and maintain the portfolio structure in a manner which does not erode the active investment opportunities offered by selected institutions

Gallagher, D.R., Nadarajah, P. & Pinnuck, M. 2006, 'Top management turnover: An examination of portfolio holdings and fund performance', Australian Journal of Management, vol. 31, no. 2, pp. 265-292.
View description>>

We examine the performance and portfolio characteristics of actively managed equity funds impacted by top management turnover. Utilizing a unique database of monthly portfolio holdings, our study finds that, post-replacement, previously poor performing funds experience improved returns. However, this improved performance is not attributable to superior stock selection skill. We also find these new managers decrease the fund's reliance on momentum strategies and decrease the portfolio's concentration, which then leads to a reduced tracking-error volatility. Prior to the replacement event, underperforming investment managers exhibit preferences for larger, growth-oriented stocks, as well as riding momentum strategies and increasing portfolio turnover.

Gallagher, D.R. & Looi, A. 2006, 'Trading behaviour and the performance of daily institutional trades', Accounting and Finance, vol. 46, no. 1, pp. 125-147.
View/Download from: Publisher's site
View description>>

Using a unique database of daily trading activity, the present study examines the ability of active Australian equity managers to earn superior risk-adjusted returns. We find evidence of superior trade performance, where performance is a function of stock size. Our findings indicate that active equity managers are able to successfully exploit private information more readily in stocks ranked 101?150 by market-cap, where the degree of analyst coverage, information flows and market efficiency are lower than for large-cap stocks. We also find evidence of manager specialization. Our evidence provides further support of the value of active investment management in Australian equities.

Benson, K., Gallagher, D.R. & Teodorowski, P. 2005, 'Momentum investing and the asset allocation decision', Accounting and Finance, vol. 47, no. 4, pp. 571-598.
View/Download from: Publisher's site
View description>>

This study examines the active asset allocation decisions of Australian multisector fund managers to determine whether active fund managers engage in momentum strategies. We find evidence supporting the existence of momentum investing in active asset allocation strategies. This evidence exists in the Australian Equities, Australian Fixed Interest and Listed Property asset classes. Interestingly, balanced funds adopt contrarian strategies in the International Equities asset class. We also examine whether there is any association between a fund's market timing skill and the execution of momentum strategies. Our results show that fund managers with no market timing skill are momentum investors.

Brands, S. & Gallagher, D.R. 2005, 'Portfolio selection, diversification and fund-of-funds: A note', Accounting and Finance, vol. 45, no. 2, pp. 185-197.
View/Download from: Publisher's site
View description>>

The present paper examines the performance and diversification properties of active Australian equity fund-of-funds (FoF). Simulation analysis is employed to examine portfolio performance as a function of the number of funds in the portfolio. The present paper finds that as the number of funds in an FoF portfolio increases, performance improves in a mean?variance setting; however, measures of skewness and kurtosis behave less favourably given an investor's preferences for the higher moments of the return distribution. The majority of diversification benefits are realized when a portfolio of approximately 6 active equity funds are included in the FoF portfolio.

Faff, R.W., Gallagher, D.R. & Wu, E. 2005, 'Tactical asset allocation: Australian evidence', Australian Journal of Management, vol. 30, no. 2, pp. 261-282.
View description>>

This paper evaluates the tactical asset allocation (TAA) capabilities, strategies and behaviour of Australian investment managers who invest assets across multiple asset classes. Specifically, we analyse the behaviour of balanced, growth and capital-stable fund managers with regard to their asset allocation activity across defensive (cash, domestic bonds, overseas bonds) and growth (domestic equities, international equities, property) asset classes, over the period December 1989 to February 2001. Overall, our evidence suggests that active managers have been unable to deliver investors with superior returns through tactical asset allocation. While the most successful asset class, domestic equities, has been value-enhancing, international shares and domestic fixed interest have generally detracted value. Finally, across all asset classes examined, our findings suggest that asset allocation into domestic equities is the most influenced by public economic information variables, with short-term interest rates, the term structure and dividend yield all having a significant explanatory role.

Fong, K., Gallagher, D.R. & Ng, A. 2005, 'The use of derivatives by investment managers and implications for portfolio performance and risk', International Review of Finance, vol. 5, no. 1-2, pp. 1-29.
View/Download from: Publisher's site
View description>>

This study provides an empirical examination of derivative instruments used by institutional investors. Our analysis provides a unique insight into the role and benefits of derivative securities in active equity portfolio management. We contribute to the literature by using a database that comprises the periodic portfolio holdings and daily trades of institutional fund managers. The consequence of derivative use is analyzed using a number of performance and risk measures. Overall, we find the use of derivatives have a negligible impact on fund returns, and is primarily attributed to low levels of derivative exposure relative to total fund size. We also evaluate how derivatives are used by considering the trading strategies executed by active investment managers. Specifically, option trading patterns are consistent with the execution of momentum trading strategies. This study also documents that active investment managers prefer not to use options markets to engage in informed trading

Frino, A., Gallagher, D.R. & Oetomo, T. 2005, 'Index tracking in Australian equities', JASSA, vol. 1, no. Autumn, pp. 31-36.
View description>>

The growth in passive investment management has been significant over the last decade. Total assets benchmarked to the S&P SOO index exceed US$I trillion, and a similar experience of investors embracing indexing have been recorded across other Western countries, including the UK, Canada and Australia.

Frino, A., Gallagher, D.R. & Oetomo, T. 2005, 'The index tracking strategies of passive and enhanced index equity funds', Australian Journal of Management, vol. 30, no. 1, pp. 23-55.
View description>>

This study represents the first empirical examination of the daily trading and portfolio configuration strategies of index and enhanced index equity funds. We document that passive funds benefit from employing less rigid rebalancing and investment strategies. During index revision periods, enhanced index funds commence portfolio rebalancing earlier than index funds, and employ more patient trading strategies. This activity translates into higher returns and lower trading costs for enhanced index funds. In cases where passive funds do not perfectly mimic the benchmark, passive funds exhibit a greater propensity to overweight stocks with higher liquidity, larger market capitalization and higher past performance. For nonindex portfolio holdings, enhanced funds exhibit a higher propensity to hold 'winners' and sell 'losers'.

Gallagher, D.R. & Gardner, P. 2005, 'Portfolio design and challenges inherent in multiple manager structures', JASSA, vol. 4, no. Summer, pp. 1-12.
View description>>

In Australia and throughout the world, implementation of a pension fund's investment strategy typically involves delegating responsibility to external investment managers, who themselves operate independently and competitively. In light of the fact that the portfolio management function is commonly executed by a number of decentralised decision-makers, pension fund trustees should be even more concerned about the need to ensure optimality of the aggregate fund's investment arrangements.

Gallagher, D.R. & Martin, K. 2005, 'Size and investment performance: A research note', Abacus, vol. 41, no. 1, pp. 55-65.
View/Download from: Publisher's site
View description>>

This article examines the performance of actively managed Australian equity funds and the extent to which both fund size and manager size are related to risk-adjusted returns. Larger investment managers, by definition, engage in higher trade volume. The literature documents that transaction costs and trade difficulty increase with trade size, given difficulties associated with`large? trades and their potential market impact on security prices. Therefore, ceteris paribus, large orders are consistent with lower levels of efficiency in trade execution and higher transaction costs. While larger investment managers may experience material disadvantages relative to their smaller counterparts, the Australian literature to date has largely ignored the issues of asset size and the long run performance of investment offerings. This article, employing returns and fund size data that control for survivorship bias, documents that while large retail active equity funds earn higher risk-adjusted returns (after expenses) than small funds, the difference in mean performance is not significantly different. In the institutional sphere, the study also finds no statistically significant performance differences (net of expenses) between funds on the basis of portfolio size. These findings suggest the hypothesis that performance declines with fund size is not supported empirically.

Brands, S. & Gallagher, D.R. 2004, 'Examining the risk and return properties of fund-of-funds', JASSA, vol. Autumn, no. 1, pp. 1-5.

Dwyer, T. & Gallagher, D.R. 2004, 'Visualising changes in fund manager holdings in two and a half dimensions', Information Visualisation, vol. 3, no. 4, pp. 227-244.
View description>>

We explore a multiple view, or overview and detail, method for visualising a high-dimensional portfolio holdings data set with attributes that change over time. The method employs techniques from multidimensional scaling and graph visualisation to find a two-dimensional mapping for high-dimensional data. In both the overview and detail views, time is mapped to the third dimension providing a two and a half-dimensional view of changes in the data. We demonstrate the utility of the paradigm with a prototype system for visualisation of movements within a large set of UK fund managers' stock portfolios

Gallagher, D.R. & Jarnecic, E. 2004, 'International equity funds, performance, and investor flows: Australian evidence', Journal of Multinational Financial Management, vol. 14, no. 1, pp. 81-95.
View/Download from: Publisher's site
View description>>

This is the first paper in the Australian literature to examine the investment performance of actively managed international equity funds (domiciled in Australia). Both institutional and retail international equity funds are assessed together with the impacts of investor fund flows on portfolio returns. Performance is also evaluated using conditional measures that account for public information in the global economy, however, despite an improvement in the measurement of risk-adjusted returns, performance remains consistent with an efficient global market. These findings support prior research, which concludes that active management does not provide investors with superior returns to passive indices. When consideration is given to the liquidity service provided by active managers, fund flows are shown to negatively impact on performance.

Gallagher, D.R. & Nadarajah, P. 2004, 'Top management turnover: An analysis of active Australian investment managers', Australian Journal of Management, vol. 29, no. 2, pp. 243-274.
View description>>

This study examines the relationship between top management turnover (i.e. investment directors) and investment performance for actively managed Australian funds. This issue is significant given the importance of executive management in the implementation of the institution's investment strategy, the sizeable assets under their control, as well as the overall success and profitability of the funds management operation. In addition, investors, asset consultants, managed-fund ratings agencies and the financial media devote significant resources to the scrutiny of performance, the organisational activities, leadership and human capital of investment management firms. Accordingly, this study examines the impact of performance and fund-flow activity on top management turnover in both the pre-and-post replacement period. The research documents that turnover of underperforming investment managers results in significantly higher performance in the post-replacement period, while turnover coinciding with outperforming managers delivers investors significantly lower returns. The evidence also identifies significant changes in portfolio risk associated with managerial turnover. Finally, this research documents that underperforming investment managers exhibit significantly lower fund flows prior to replacement.

Gallagher, D.R. & Looi, A. 2003, 'Are Active Fund Managers More Successful?', JASSA, vol. Autumn, pp. 2-6.
View description>>

Australian investment managers are significant participants within the financial services sector. According to the Australian Bureau of Statistics, the size of the Australian investment management industry was in excess of $A6SS billion at 31 March 2002. Considering that the Australian equities component of aggregate assets continues to be the most significant individual asset class within diversified multi-sector portfolios, the importance of the domestic shares sector cannot be understated.

Gallagher, D.R. & Nadarajah, P. 2003, 'Investment director turnover and the impact on performance', JASSA, vol. Summer, no. 4, pp. 10-14.

Gallagher, D.R. 2003, 'Investment manager characteristics, strategy, top management changes and fund performance', Accounting and Finance, vol. 43, no. 3, pp. 283-309.
View/Download from: Publisher's site
View description>>

The present study examines the performance of Australian investment management organisations with direct reference to their specific characteristics and strategies employed. Using a unique information source, performance is evaluated for actively managed institutional balanced funds, Australian share funds and Australian bond funds. For balanced mandates, performance is evaluated with respect to the investment strategy adopted, the experience and qualifications held by investment professionals, and the tenure of the key investment professionals. The present study examines the performance of top management and the impact on returns when turnover arises. The research documents that a significant number of active Australian equity managers earned superior risk-adjusted returns in the period, however, active managers perform in line with market indices for balanced funds and Australian bond funds. A number of manager characteristics are also found to predict risk-adjusted returns, systematic risk and investment expenses for balanced funds.

Bird, R.G. & Gallagher, D.R. 2002, 'The evaluation of active manager returns in a non-symmetrical environment', Journal of Asset Management, vol. 2, no. 4, pp. 303-324.
View/Download from: Publisher's site

Frino, A. & Gallagher, D.R. 2002, 'Is index performance achievable? An analysis of Australian equity index funds', Abacus, vol. 38, no. 2, pp. 200-214.

Gallagher, D.R. & Jarnecic, E. 2002, 'The performance of active Australian bond funds', Australian Journal of Management, vol. 27, no. 2, pp. 163-185.

Frino, A. & Gallagher, D.R. 2001, 'Tracking S&P 500 index funds', Journal of Portfolio Management, vol. 28, no. 1, pp. 44-55.

Gallagher, D.R. 2001, 'Attribution of investment performance: An analysis of Australian pooled superannuation funds', Accounting and Finance, vol. 41, no. 1-2, pp. 41-62.

Gallagher, D.R. 2001, 'The characteristics and strategies of Australian investment managers', JASSA, vol. Spring, pp. 1-5.

Frino, A. & Gallagher, D.R. 2000, 'The problems of being passive - Evaluating the merits of an index investment', JASSA, vol. Winter, pp. 28-32.

Gallagher, D.R. 2000, 'Do active fund managers deliver? - How market timing and security selection performance shapes up', JASSA, vol. Autumn, pp. 2-5.

Gallagher, D.R. & Jarnecic, E. 2000, 'Index: Boring or bountiful?', JASSA, vol. Summer, pp. 11-14.

Gallagher, D.R. 2007, 'Toward a more sophisticated portfolio disclosure regime: Would it advance Australia's investment industry?', The Melbourne Review, vol. 3, no. 1, pp. 58-64.
View description>>

What are the potential opportunities, benefits and challenges of introducing a US-style portfolio disclosure regime in Australia? While there are obvious challenges and concerns associated with compliance, free riding and front running, a more centralised repository of data on the portfolio holdings for Australian fund managers would enable improved monitoring and performance analysis, and would better serve the needs of investors and regulators.

Gallagher, D.R. & Segara, R. 2006, 'The performance and trading characteristics of exchange-traded funds', Journal of Investment Strategy, vol. 1, no. 2, pp. 49-60.
View description>>

This study examines the performance and trading characteristics of exchange-traded funds (ETFs) in Australia. We investigate the ability of index oriented (classical) ETFs to track underlying equity benchmarks on the Australian Stock Exchange, and provide a comparison of the tracking error volatility between these types of market-traded instruments and equity index funds operated off-market. Our study finds that while index-oriented ETFs closely track their respective benchmarks, these instruments have not been embraced to the same extent as in overseas markets, and relative to off-market index managed funds. Our research provides an important comparison of classical ETFs between Australia and the United States.

Gallagher, D.R. & Looi, A. 2005, 'An examination of the market impact costs of active Australian equity managers', Journal of Investment Strategy, vol. 1, no. 1, pp. 47-58.

Frino, A., Gallagher, D.R., Neubert, A. & Oetomo, T. 2004, 'Index design and implications for index tracking', Journal of Portfolio Management, vol. 30, no. 2, pp. 89-95.
View description>>

Index funds aim to deliver the returns and the risk of an underlying benchmark index. Researchers focus on four exogenous determinants, revisions in S&P 500 index composition, share issuances, share repurchases, and spin-offs, as well as two related factors that are associated with index maintenance rules, the treatment of dividends by the index, and implicit transaction costs that are incurred when changes arise in the Index Divisor. This research on the exogenous determinants of tracking error in S&P 500 index funds that arise from amendments to the Index Divisor and the effect of transaction costs and the treatment of dividends should be of significant interest to the investment industry, particularly index committees, investors, and mutual fund managers. If they better understand the drivers of tracking error, market participants can more easily see the implications that maintenance of an index might have for index-mimicking portfolios. Tracking error is found to be significantly related to index revisions, share issuances, spin-offs, share repurchases, index replication strategy, and fund size. And index funds also exhibit a seasonal pattern in tracking error.

Gallagher, D.R. & Jarnecic, E. 2000, 'Active international equity investing: The evidence', ASX Perspective, vol. 4th Qtr, pp. 47-50.

Gallagher, D.R. 1999, 'The performance of active Australian equity managed funds', ASX Perspective, vol. 2nd Qtr, pp. 29-32.

Fong, K., Gallagher, D.R. & Lee, A.D. 2008, 'Do institutions really exploit individuals? The intraday losses and offsetting returns of discount and premium retail investors', 2008 Australasian Finance and Banking Conference, Sydney, Australia, December 2008.

Fong, K., Gallagher, D.R. & Lee, A.D. 2008, 'The extent of individual investor losses: Evidence from the Australian Securities Exchange', 2008 Finsia Melbourne Centre for Financial Studies Banking and Finance Conference, Melbourne, Australia, September 2008.

Fong, K., Foster, F.D., Gallagher, D.R. & Lee, A.D. 2008, 'The price impact of trades executed using multiple brokers', 2008 Financial Management Association International Annual Meeting, Texas, USA, October 2008.

Fong, K., Foster, F.D., Gallagher, D.R. & Lee, A.D. 2008, 'The price impact of trades executed using multiple brokers', 2008 Accounting and Finance Association of Australia and New Zealand Conference, Sydney, Australia, July 2008.

Fong, K., Gallagher, D.R. & Lee, A.D. 2007, 'Benchmarking benchmarks: Measuring characteristic selectivity using equity portfolio holdings', 2007 PhD Conference in Economics and Business, Perth, Australia, October 2007.

Fong, K., Gallagher, D.R. & Lee, A.D. 2007, 'The price impact of trades executed using multiple brokers', 2007 Australasian Finance and Banking Conference, Sydney, Australia, December 2007.

Fong, K., Gallagher, D.R., Lee, A.D. 2006, 'Measuring characteristic selectivity and timing ability using equity portfolio holdings', 2006 Australasian Finance and Banking Conference, Sydney, Australia, December 2006.