Active Management and Performance: A Preliminary Analysis for
Transcription
Active Management and Performance: A Preliminary Analysis for
Active Management and Performance: A Preliminary Analysis for BRIC Markets and BRICFocused Funds Antonio Fasano1 (speaker) – University of Rome LUISS Claudio Boido – University of Siena Pino Galloppo – University of Tuscia Viterbo An asset allocation topic of interest both to the academic and practitioner communities, concern the role of the active investment policies in the context of traditional pricing frameworks. In as far markets are not Fama-efficient managers might gain significant premia by exploiting their superior information levels and leveraging the skills gained from their professional experience, in the form of active portfolio strategies. Indeed, conventional wisdom, and classical portfolio theory, suggests that investors should widely, and wisely, diversify their holdings across industries to reduce their portfolios idiosyncratic risk. However, the actual management practice shows that managers might still want to hold concentrated portfolios if they believe some country areas, style management or sectors will outperform the overall market or a benchmark representing it. In fact, skilled fund managers could have informational advantages in specific sectors and benefit from them to get superior performance, by holding more concentrated portfolios and selecting profitable stocks in specific sectors. Consistent with this behaviour, a number of studies ascertain a positive relation between fund performance and industry concentration (see e.g. Kacperczyk, Sialm, and Zheng, 2005, Brown, Harlow, and Zhang, 2009), which poses the needs to find sound methodological approaches and the measures to quantify the level of “managerial activism” and the related impact on performance. 1 Corresponding author afasano@luiss.it, http://docenti.luiss.it/fasano. The current literature are most often focused on US markets and, to the best of our knowledge, there is a scant scientific literature with respect to BRIC markets, despite their ever increasing role in the global marketplace. Given the subject at hand, it is necessary to set a rigorous notion of what the active management is, or should be, so that we can understand if those who engage in it can create sizeable value for the investors. For the scope of this study, we identify active investment strategies as those where managers hold portfolios concentrated in specific market segments trying to overperform a declared benchmark related to those segments. The first goal of this paper is translating the notion of “activism” into actual measures which can be observable in actual fund portfolios. Thereafter the impact of active policies on market performance is assessed with respect to the BRIC area and BRIC-focused funds. To quantify the level of “managerial activism”, one possibility is to use the R-square as a diversification reverse proxy (see Amihud and Goyenko, 2013.). The assumption behind is that the tracking error level is a measure of portfolio concentration, i.e. the more the tracking error the more the fund wealth is focused on a given industry or sector, and therefore on few assets, deviating from the passive portfolio replicating the benchmark. This active policy can be the effect of the manager superior information (and skills) about specific market segments, positively affecting performance when successfully carried out. Another innovative approach (see Cremers and Petajisto, 2009) introduces a measure denoted Active Share, which aims at gauging the extent of active management employed by fund managers. In this case, instead of measuring the tracking error volatility to get deviations from the benchmark, it is possible to analyse the actual portfolio holdings against the benchmark holdings. Therefore the Active Share of a portfolio can be defined as the size of portfolio positions underweighting the benchmark. Another promising approach for measuring the active investment can leverage the notion of breadth was introduced by Grinold and Kahn in the context of their influential “Fundamental Law of Active Management”. The breadth denotes the “opportunity to diversify across independent investment decisions, over the course of a year”, which is quite a general definition. To convey the concept into a quantitative context, we can approximate the breadth of the underlying fund strategies by means of the number of factors (in a predictive model) to which the funds are exposed. In particular, it is interesting to investigate whether being exposed to multiple factors simultaneously matters for improving performance. Our preliminary results show that the BRIC area doesn’t follow strictly what other scholars have found with respect to traditional global or US-focused analyses. That is not surprising, considering that BRIC markets are younger markets, which might offer more challenges, but also more opportunities to those active investors who are able to readily capture them.