FUND SIZE AND ABNORMAL RETURNS IN

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Date

2011-06-08

Authors

Pillay, Neelan

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Abstract

Market sentiment, popular press and the academic fraternity all seem divided on the issue of whether a fund’s asset base affects its performance such that the delivery of above average market returns is impacted. A historical simulation was employed in constructing hypothetical active portfolios of varying asset sizes for each of the years, 1991 to 2005. The portfolios consisted of 40 randomly selected stocks; chosen from an investment universe made up of the top 160 listed shares on the JSE, based on market capitalisation. Each portfolio was simulated a 1,000 times per fund size, per simulation year. The results of the simulation indicated a fund’s size to be a contributing factor to its performance with market/stock liquidity the underlying reason for this relationship. Active management at the larger end of the fund size spectrum is ineffective such that a portfolio manager’s stock picking ability is severely compromised resulting in average or below average performance results. Related to this non-performance, large fund managers are not likely to earn out-performance management fees. The relevance of these findings to the South African fund management industry is for large funds to stop their active betting taking and to switch to passive investment strategies. Further, to alter their current out-performance management fee structures accordingly Small to medium sized portfolio managers must be aware of the size effect ensuring that their funds are ‘capped’/closed to inflows when their asset base starts to constraint their active positions

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MBA - WBS

Keywords

Johannesburg Securities Exchange, Fund management industry

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