Observations Observations

September 1, 1998


The Young and the Risk-Averse

Are youthful mutual fund managers really "young Turks" who engage in risky investing because they don't realize that the market also drops? Perhaps. Nevertheless, it may be that career concerns keep this wild-eyed behavior in check. Senior executives use past performance to determine who is retained, and this works against choice of high-risk portfolios by younger managers, say economists Judith Chevalier and Glenn Ellison.

Consider a seasoned manager whose fund has a bad year. If the manager has a reasonable record, then the recent experience might be dismissed as a blip. A young manager with a similar year, but without the track record, will be judged less generously. Chevalier and Ellison find that younger managers indeed face a higher probability of being fired in a bad year, with no commensurate benefit on the upside.

Since a bad year could sink their careers, young managers would do well to invest more conservatively. Chevalier and Ellison observe that they do. Funds run by younger managers tend to track the overall market more closely and mirror the asset compositions of similar funds. Young managers are also more likely to fully diversify, rather than go out on a limb with a small number of "hot picks." But there are other possible explanations for these findings. "Running money" is a job with a high rate of burnout. Those who stay in the job may be different from those who started out, especially in their willingness to take risks. "Experienced fund managers have the courage of their convictions," suggests David B. Jones, vice president at Fidelity Investments. The pack of managers may be winnowed of the risk-averse as they mature, or the experienced may pick more confidently. Or career concerns may indeed make a herd out of those proverbial upstarts.



Northern Vacationland

Vermont, Maine, and New Hampshire have the highest concentrations of vacation homes in the country-17, 15, and 11 percent of all housing units, respectively, in 1990 (the most recent figures available). States such as Florida and Michigan have higher absolute numbers of vacation homes. But on a percentage basis, these New England states are far ahead of the pack The runner-up, Alaska, trails with 7 percent, and only 3 percent of housing units at the national level are vacation homes.

The phenomenon appears to be a function of income, geography, and population. Many middle- and upper-income people from New York and eastern Massachusetts buy or build second homes in areas they can visit easily. Add rustic appeal and you have the recipe for the perfect weekend retreat. Relatively unpopulated northern New England is especially attractive to people who want a quieter, more "natural" environment when taking a break. At the same time, the sparse population of locals means a lower total number of housing units, which contributes to a high percentage of vacation homes.

Aside from enabling a state to brag "Vacationland" on its license plates, the high percentage of second homes has beneficial economic effects. Economist David Christophides at Regional Financial Associates says building permit rates and construction employment are buoyed by those building vacation homes. Moreover, states can collect more property tax revenues per local resident.



Smoke Rings

Raising state cigarette taxes to increase revenues destined for antismoking campaigns and other health programs may have unwholesome effects. In October of 1996, Massachusetts increased excise taxes on cigarettes by nearly 50 percent. This created lucrative incentives for interstate smuggling by widening the disparity in cigarette taxes among New England states.

Massachusetts, at 76 cents per pack, has one of the highest rates in the nation while New Hampshire-which also has no sales tax-only charges 37 cents per pack. Given the proximity, it is no wonder that a special unit of the Massachusetts Department of Revenue has random "cigarette drives" on convenience stores in search of improperly stamped packs.

While cross-border shopping by individuals and store owners has increased, the U.S. Bureau of Alcohol, Tobacco, and Firearms is more concerned with organized crime. In 1997, the ATF seized approximately $1.1 million in tobacco commodities, and recommended 16 cases involving 31 defendants for federal prosecution. Thanks to increased smuggling, the ATF has opened a new office to target tobacco diversion.

Though tax revenues from tobacco in Massachusetts did indeed increase (up 21 percent from fiscal year 1996 to 1997), revenue growth was significantly below projections. Certainly, some loss should be expected due to falling demand. But cross-border shopping and smuggling-combined with the increased costs to fight illegal activity-have reduced the fiscal benefits of the law. -JAY SEIDEMAN