Are Financial Institutions Better Investors?

This paper investigates the investment performance of a comprehensive group of financial institutions including banks, insurance companies, mutual funds, independent investment advisors, and corporate and state pension funds based on quarterly disclosures of their equity-portfolio holdings. On aggregate, financial institutions exhibit significant abnormal performance before expenses are subtracted. This result is robust with respect to several conditional and unconditional performance measures based on factor- and characteristic-benchmarks. Institutional performance is related to the size of the managed portfolio, its stock characteristics, and its flows. Performance varies across types of institutions - banks, independent investment advisors, and mutual funds significantly outperform insurance companies and state pension funds. This pattern is not caused by systematic mispricings by the applied asset pricing models. The variation of performance across the major institutional types is consistent with agency theory and the "transparency" hypothesis of Ross (1989).