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Fund size and returns on the JSE

Fund size and returns on the JSE Market sentiment, the popular press and academia are divided on the question of whether the size of a fund affects its performance. This study examines the issue by constructing hypothetical portfolios of varying sizes, using historical data for each of the years 1991 to 2008. Each portfolio consisted of 40 randomly selected stocks, chosen from an investment universe of the top 160 JSE listed shares in terms of market capitalisation. Rules were applied to limit the concentration of any particular share and to ensure that trading volumes were practical. Simulation was then used to explore the boundaries of possible returns for each portfolio.The results of the simulation indicate that a fund's size is a contributing factor to its performance; liquidity being the underlying reason for this relationship. Performance was found to be affected for fund sizes greater than about R5bn. Large funds are increasingly forced towards market-cap weightings with a resulting concentration in resource stocks.The relevance of these findings to the South African fund management industry is that large funds should switch to passive investment strategies. Small to medium sized portfolio managers must be aware of the size effect and ensure that their funds are ‘capped’. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Investment Analysts Journal Taylor & Francis

Fund size and returns on the JSE

Pillay, N; Muller, C; Ward, M
Investment Analysts Journal , Volume 39 (71): 11 – Jan 1, 2010
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Publisher
Taylor & Francis
Copyright
© 2010 Taylor and Francis Group, LLC
ISSN
2077-0227
eISSN
1029-3523
DOI
10.1080/10293523.2010.11082515
Publisher site
See Article on Publisher Site

Abstract

Market sentiment, the popular press and academia are divided on the question of whether the size of a fund affects its performance. This study examines the issue by constructing hypothetical portfolios of varying sizes, using historical data for each of the years 1991 to 2008. Each portfolio consisted of 40 randomly selected stocks, chosen from an investment universe of the top 160 JSE listed shares in terms of market capitalisation. Rules were applied to limit the concentration of any particular share and to ensure that trading volumes were practical. Simulation was then used to explore the boundaries of possible returns for each portfolio.The results of the simulation indicate that a fund's size is a contributing factor to its performance; liquidity being the underlying reason for this relationship. Performance was found to be affected for fund sizes greater than about R5bn. Large funds are increasingly forced towards market-cap weightings with a resulting concentration in resource stocks.The relevance of these findings to the South African fund management industry is that large funds should switch to passive investment strategies. Small to medium sized portfolio managers must be aware of the size effect and ensure that their funds are ‘capped’.

Journal

Investment Analysts Journal – Taylor & Francis

Published: Jan 1, 2010

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