FUND SIZE AND ABNORMAL RETURNS IN
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
Description
MBA - WBS
Keywords
Johannesburg Securities Exchange, Fund management industry