Portfolio Concentration and Investment Manager Performance

Portfolio Concentration and Investment Manager Performance

38 Pages · 2006 · 316 KB · English

This study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process – stock selection skill and portfolio management. Our study documents a positive 

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Portfolio Concentration and Investment Manager Performance* Simone Brands a Stephen J Brown b David R Gallagher a, † a School of Banking and Finance, The University of New South Wales, Sydney, NSW 2052 AUSTRALIA b NYU Stern School of Business, New York, USA _____________________________________________________________ Abstract: This study examines the relationship between investment performance and concentration in active equity portfolios Active management is dependent on the success of two important components in the investment process – stock selection skill and portfolio management Our study documents a positive relationship between fund performance and portfolio concentration The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX) We find more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions which are not affiliated with a bank or lifeoffice entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300 JEL classification: G23 Keywords: Portfolio concentration, investment performance, tracking error, active funds _____________________________________________________________________ © 20032005 Simone Brands, Stephen J Brown, and David R Gallagher All rights reserved † Corresponding author Mail: PO Box H58, Australia Square, Sydney, NSW, 1215, Australia Telephone: (+61 2) 9236 9106 Email: [email protected] * The authors thank Portfolio Analytics and SIRCA for the provision of portfolio holdings and ASX SEATS data, respectively We also gratefully acknowledge the helpful comments of Dave Allen, Les Balzer, Raymond da Silva Rosa, Patty Dechow, Peter Gardner, Adrian Looi, Matt Pinnuck, Anthony Richards, Peter Swan, Terry Walter, and seminar participants at The University of New South Wales, The University of Western Australia and the Reserve Bank of Australia 1 Portfolio Concentration and Investment Manager Performance _____________________________________________________________ Abstract: This study examines the relationship between investment performance and concentration in active equity portfolios Active management is dependent on the success of two important components in the investment process – stock selection skill and portfolio management Our study documents a positive relationship between fund performance and portfolio concentration The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX) We find more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions which are not affiliated with a bank or lifeoffice entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300 JEL classification: G23 Keywords: Portfolio concentration, investment performance, tracking error, active funds _____________________________________________________________________ 2 I Introduction The extent to which investment performance is rigorously scrutinized is even more significant today than ever before The significant attention provided fund performance has primarily arisen due to the substantial size of assets delegated to professional money managers, as well as the continued debate between the merits of active versus passive fund management 1 In terms of the degree of scrutiny applied to tests of active management, recent literature has documented inconsistent evidence with the efficient markets hypothesis, where some valueadded is achievable and therefore consistent with the GrossmanStiglitz (1980) informational equilibrium (eg Grinblatt and Titman (1989), Wermers (2000), Daniel et al (1997), Chen et al (2000), Pinnuck (2003), Gallagher and Looi (2005)) In particular, Wermers (2000) has contributed significantly to this literature by reopening the debate about the value of active management, where he utilizes

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