Sebastien Betermier
Associate Professor of Finance
Desautels
Faculty of Management
1001 Sherbrooke St West
Montreal, QC H3A 1G5
(514) 398 3762
sebastien.betermier at mcgill.ca
Current Positions and Research Interests
Portfolio Management, Asset Pricing, Household Finance, Pension Systems,
Sustainable Finance
I do theoretical and empirical research on the relationship between risk and return and how
it drives investors in their investment decisions. Based on my work, I
have developed a particular interest in designing sustainable
retirement systems.
In addition to my position as Associate Professor of Finance, I
currently serve as Area Coordinator of the Finance Area at the
Desautels Faculty of Management, Faculty Director of the McGill
International Portfolio Challenge, and Academic
Advisor in the Financial Markets Division at the Bank of
Canada.
Publications
The
Canadian pension fund model: A quantitative portrait
(2021), with Alexander D. Beath, Chris Flynn, and Quentin
Spehner, Journal
of Portfolio Management,
Vol: 47(5), 159-177 - Appendix
We show that, between 2004 and 2018, Canadian pension
funds outperformed their international peers both in terms
of asset performance and liability hedging. We find that a
central factor driving this success is the implementation
of a three-pillar business model that consists of i)
managing assets in-house to reduce costs, ii) redeploying
resources to investment teams for each asset class, and
iii) channeling capital toward growth assets that increase
portfolio efficiency and hedge liability risks. This model
works best for funds whose pension liabilities are indexed
to inflation.
Who
are the value and growth investors? (2017),
with Laurent Calvet and Paolo Sodini
The Journal of Finance, Vol. 72:1, 5-46 (lead
article) -- Appendix
In the past century the financial markets have
exhibited a remarkable anomaly where
the returns from value stocks exceed the returns from growth stocks.
To give an idea of how much value stocks outperform growth stocks,
the return differential (value premium) is 4-6% on average per year.
This is comparable to the risk compensation of the entire stock
market. The outperformance of value stocks goes against standard
asset pricing theory which predicts that value stocks will earn
lower returns because they are less volatile. In this paper, we
analyze the determinants of value and growth investing for the first
time and provide a clearer understanding of what is driving the
value premium anomaly.
Hedging
labor income risk (2012),
with Thomas Jansson,
Christine Parlour, and Johan Walden Journal of
Financial Economics, Vol.
105:3, 622-639 -- Appendix
Labor income represents the households' greatest source of
wealth. Because of this, we expect cyclical stocks to yield
high returns to compensate for the fact that they will suffer
large losses during economic recessions when jobs are on the
line. Surprisingly, empirical studies have struggled to
discover convincing evidence that labor income risk is as
important in financial markets as we think. In this paper we
contribute clear evidence that labor income risk does indeed
have an impact on households' investment decisions.
Reaching
for yield or
resiliency?
Explaining the shift
in Canadian pension
plan portfolios
(2021), with Nicholas
Byrne, Jean-Sebastien
Fontaine, Hayden Ford,
Jason Ho, and Chelsea
Mitchell, Bank
of Canada
Staff
Analytical
Note, 20
"Reach for yield" -
this is the commonly
heard explanation for
why pension plans
shift their portfolios
toward alternative
assets. But we show
that the new
portfolios also hold
more bonds, offer
lower average returns,
and produce smaller
and less volatile
solvency deficits.
These shifts are part
of a broader strategy
to reduce solvency
risk.
Concentration
in the market
of authorized
participants
of US
fixed-income
exchange-traded
funds
(2020) with
Rohan Arora,
Guillaume
Ouellet-Leblanc,
Adriano
Palumbo, and
Ryan
Shotlander, Bank
of Canada
Staff
Analytical
Note, 27
We show that a
small number
of authorized
participants
(APs) actively
create and
redeem shares
of US-listed
fixed-income
exchange-traded
funds
(FI-ETFs). In
2019, three
APs performed
82% of gross
creations and
redemptions of
FI-ETF shares.
In contrast,
the group of
active APs for
equity ETFs
was much more
diverse.
Creations
and
redemptions in
fixed-income
exchange-traded
funds: A shift
from bonds to
cash
(2019), with
Rohan Arora,
Guillaume
Ouellet-Leblanc,
Adriano
Palumbo, and
Ryan
Shotlander, Bank
of Canada
Staff
Analytical
Note, 34
The creation
and redemption
activity of
fixed-income
exchange-traded
funds listed
in the United
States has
shifted. Funds
of established
issuers have
traditionally
exchanged
their shares
for baskets of
bonds. In
contrast,
young funds
tend to create
and redeem
their shares
almost
exclusively in
cash. Cash
transactions
imply that new
funds are
taking on
exposure to
liquidity
risk. This has
implications
for financial
stability.
Working
Papers
A
supply and demand approach to equity pricing (2020), with
Laurent Calvet and Evan Jo
We develop a tractable general equilibrium
framework providing a direct mapping between (i) the supply and demand
for capital at the firm level and (ii) the cross-section of stock
returns. Investor behavioral tilts and hedging needs drive capital
supply, while firm profitability drives demand. Heterogeneity in
supply and demand factors determines the sign of the risk-return
relation and generates anomalies such as betting-against-beta,
betting-against-correlation, size, value, investment, and
profitability. We estimate the supply and demand schedules of over
4,000 firms and verify that the model accurately predicts the sign of
the risk-return relation conditional on characteristics.
What do the
portfolios of individual investors reveal about the
cross-section of equity returns? (2021), with
Laurent Calvet, Samuli
Knupfer, and Jens
Kvaerner
Best Paper in Asset Pricing and Market Microstructure, Northern
Finance Association Conference 2021
Morgan Stanley Best Paper Award in Investments, Academic
Research Colloquium 2021
We construct a parsimonious set of equity
factors by sorting stocks according to the sociodemographic
characteristics of the individual investors who own them. The
analysis uses administrative data on the stockholdings of
Norwegian investors in 1997-2018. Consistent with financial
theory, a mature-minus-young factor, a high wealth-minus-low
wealth, and the market factor price stock returns. Our three
factors span size, value, investment, profitability, and momentum,
and perform well in out-of-sample bootstrap tests. The tilts of
investor portfolios toward the new factors are driven by wealth,
indebtedness, macroeconomic exposure, age, gender, education, and
investment experience. Our results are consistent with hedging and
sentiment jointly driving portfolio decisions and risk premia.
Why
do homeowners invest the bulk of their wealth in their home?
(2020), with
Laurent Barras
Despite the
well-known benefits of diversification, homeowners invest mostly in
their home. A common explanation for this pattern is that homeowners
are constrained to fully own the home they want to live in. We
refute this explanation and show that the predominance of housing
stems from its distinct investment value. We then provide clarity on
the value of the housing investment. Because owning a home provides
a steady stream of housing consumption, it is equivalent to
purchasing a perpetual bond indexed to that home. Housing thus plays
a special role in the portfolio as one of the homeowner's risk-free
assets.
Menu proliferation and entry deterrence
(2021), with
David Schumacher and Ali Shahrad
Why do so few mutual fund families launch so many funds and styles
around the World? We posit that launching numerous funds on an
increasingly granular style grid allows incumbent families to congest
the product space and deter market entry. Key to this argument is the
persistently low dimensionality of the mutual fund product space,
which we establish by analyzing the names of over 40,000 equity funds
sold in 91 countries between 1931 and 2015. Over time, the strategy of
filling up the style grid has led to the dominance of few families
offering large, granular, and similar fund menus.
Green
urban development: The impact investment strategy of Canadian
pension funds (2021), with
Alexander D. Beath, Maaike Van Bragt, Yuedan Liu, and Quentin
Spehner
We investigate the investment strategy that large Canadian pension
funds implement in the private real estate market. Even though
they manage just 6% of global pension assets in our data, Canadian
pension funds are responsible for 60% of the total value of direct
real estate deals involving a pension fund. Their portfolio
strategy combines global asset diversification with a local impact
strategy that consists of internally developing and green urban
properties. Using a common benchmarking methodology across funds,
we show that this strategy delivers superior performance net of
fees and drives the green development of major city centers.
Blog posts and op-eds
Green
urban development: the impact investment strategy of Canadian
pension funds The FinReg Blog, Global Financial Markets Center,
Duke University School of Law, June 16 2022, with Alexander D. Beath,
Maaike Van Bragt, Yuedan Liu, and Quentin Spehner
Should
universities abruptly divest from fossil fuel industry stocks?
Corporate Knights, Feb 18, 2020
Are
university pension plans the next battleground in the climate-change
debate? The Globe and Mail, Dec 20 2019
Designing
a sustainable retirement model for American businesses American
Business Magazine, 2019 Vol 12(30)
Case
Studies
The following cases address key issues faced by
pension funds and other institutional investors around the World. They
have been written by the students of a class I teach every Winter for
the McGill International Portfolio Challenge (MIPC).
Bouwen & Pensioen:
Rethinking pension plan design in the context of low
yields. (2021).
How can long-term asset managers find ways to
sustainably generate returns while minimizing the risks
in the current environment of ultra-low bond yields? We
focus on the ongoing pension reform in the Netherlands
and study the portfolio design of a fictional newly
launched collective defined contribution plan (CDC)
which provides new possibilities for plan members to
share risks with each other.
BNSF: UK launches a new
sovereign wealth fund to promote economic equality
and independence.
(2020).
We are now seeing countries seeking independence as
protectionist tendencies are being revived and
geo-economic dynamics are changing. How should long-term
asset managers invest in the midst of rising
protectionist tendencies and social inequalities? We
study the fictional launch of the British National
Strategic Fund, a new sovereign wealth fund with a
triple mandate to generate risk-adjusted returns and
promote economic equality and independence.
Designing
environmentally sustainable investment strategies: the case of
NLPIB. (2019).
How do we align a fund manager's fiduciary duty to deliver returns
with long-run environmental sustainability? We study the case of a
fictional fund based in Newfoundland and Labrador. The fund is
under pressure to divest from its holdings in the oil & gas
industry, which have traditionally been a large,
revenue-generating component of the fund's assets and one of the
largest sources of economic growth in the province. The purpose of
the case is to devise an optimal portfolio strategy that
accommodates the competing interests of the different stakeholders
involved and addresses climate risks.
Solving
the underfunding of U.S. state pension plans: the case
of VanPERS. (2018).
The underfunding of U.S. state pension plans is incredibly
complex and difficult to solve because it involves a
uniquely large and diverse group of stakeholders with
conflicting interests: unions, municipalities, state
governments, and plan members. This complexity is
compounded by U.S. regulation that mandates pension funds
to discount their liabilities at the expected return on
their assets. We highlight these issues by studying the
case of an underfunded public pension plan in a fictional
U.S. state: Vandalia.
Rescuing a
corporate D.B. fund: the case of
Lumber Co.
(2017).
When a private pension plan runs a
deficit, should the fund manager try
to eliminate the deficit by taking on
more risk and aim for higher returns,
or is it up to the corporate sponsor
to make a special contribution to the
plan? We study the case of an
underfunded private pension plan in
Canada.