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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.