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The purpose of this study is to investigate explanations for the behaviour of the size premium using measures of large and small stock holdings of mutual funds.
Abstract
Purpose
The purpose of this study is to investigate explanations for the behaviour of the size premium using measures of large and small stock holdings of mutual funds.
Design/methodology/approach
Returns‐based style analysis is used to measure asset class exposure by regressing equity fund returns on asset class returns over the period 1965 to 2003. The coefficients estimate portfolio asset allocation indicating a fund's investment styles. The estimates from 36‐month rolling regressions of US equity fund returns on various asset classes are aggregated and used as measures of investors' exposure to small stocks. The patterns are analyzed in the context of the behaviour of the abnormal returns to small stocks.
Findings
The results indicate the importance of the 1974‐1975 bear market to the historical size premium and support an overreaction and reversal argument. Exposure to small stocks drops dramatically between 1975 and 1977, suggesting a sell‐off of small stocks. Fund exposure subsequently increases rapidly to its highest levels between 1982 and the market crash of 1987. These patterns are consistent with pricing pressure that would lead to the initial undervaluation and subsequent overvaluation driving returns to small stocks over this period.
Originality/value
The study introduces the application of the returns‐based style analysis methodology to studying an asset‐pricing phenomenon and demonstrates important insights that can be obtained from the use of this methodology in new contexts and at an aggregate level.
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Ross Fowler, Robin Grieves and J. Clay Singleton
This article aims to explore three facets of the historical performance of a sample of actively managed unit trusts available to New Zealand investors: asset allocation, style…
Abstract
Purpose
This article aims to explore three facets of the historical performance of a sample of actively managed unit trusts available to New Zealand investors: asset allocation, style analysis, and return attribution.
Design/methodology/approach
Because New Zealand does not require unit trusts to disclose their security holdings, the paper used returns‐based style analysis to infer how these trusts have allocated their funds among asset classes.
Findings
The research has found that, for unit trusts available to New Zealand investors, asset allocation can explain a significant amount of the differences in return across time and between trusts. Across time, asset allocation accounts for about 80 per cent of the variation in actual return. Between trusts, asset allocation explains about 60 per cent of the variation in returns. From either perspective, the choice of asset allocation is an important factor in explaining returns.
Originality/value
The paper suggests that active management barely earns its fees and that passive investments might do as well or better.
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There are three basic approaches to style analysis: (i) an examination of the portfolio and security selection procedures used by the fund managers, (ii) a factor model approach…
Abstract
There are three basic approaches to style analysis: (i) an examination of the portfolio and security selection procedures used by the fund managers, (ii) a factor model approach, and (iii) return‐based approaches, all with their own strengths and weaknesses. Of the return‐based methods the effective asset mix approach, as devised and popularised by Sharpe, offers the investor the simplest route to style analysis. This study applies this approach to a sample of 37 property funds in the UK and shows that style analysis can make an important contribution to the analysis of portfolio performance. Results that should prove of considerable interest to fund managers and property professionals alike.
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Paul L. Gronewoller, Janet McLeod and Lawrence C. Rose
This study evaluates the practicability of style analysis in evaluating the risk‐adjusted performance of New Zealand's retail equity trusts. The size of the New Zealand market and…
Abstract
This study evaluates the practicability of style analysis in evaluating the risk‐adjusted performance of New Zealand's retail equity trusts. The size of the New Zealand market and the short history of data available generate doubts concerning the usefulness of style analysis under these conditions. Style analysis provides useful insight when applied to the New Zealand retail equity unit trust sector. Two prevalent styles are identified, a large cap style and a mid‐cap‐value/small cap style. Little variation in style was detected for the group of trusts that tracked the large‐cap equity index but substantial variation was indicated in relative performance versus a passive investment in their style benchmarks. Significant variation was detected, both in terms of style and relative performance of trusts that tracked a mid‐cap‐value/small‐cap index. A small number of New Zealand equity managers were able to maintain a consistent style, while meeting or beating the performance of their style benchmarks.
Bong Chan Kho, Uk Chang and Youngsoo Choi
We illustrate empirically the use of return-based style analysis for domestic stock funds. We search the optimal style model according to the tracking errors, investigate the…
Abstract
We illustrate empirically the use of return-based style analysis for domestic stock funds. We search the optimal style model according to the tracking errors, investigate the consistency of the fund style for the optimally selected model, and finally investigate the relationship between fund styles and their fund performance. We use weekly fund return data of domestic stock funds from January 2, 2002 to June 30, 2008, and do style analyses based on the various style indices. The major findings are as follows.
Firstly, we find that the style index models with constraint which in practice restricts short sale are better than those with no such constraint. Secondly, we find that the style index model which divides stock market with four categorized indices based on the dimension of size and book-to market and includes the bond market index is the most useful if they are evaluated based on the out-of-sample tracking errors. While adding the Fama-French 3 factors to the selected model does not improve the explanation power, adding the industry sector indexes improves the explanation power. Thirdly, we investigate the consistency of the fund style models and find that the better performing funds are more volatile in the change of the fund style. Fourthly, we find that, contrary to the expectation that the growth-oriented funds perform better than the value-oriented one, the fund performance and style are observed to be mixed. This finding shows that the fund styles are frequently changed according to their performances and market conditions.
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The author suggests an empirical model to analyze the investment style of individual hedge funds and fund of funds. This approach is based on a mixture of the style analysis…
Abstract
The author suggests an empirical model to analyze the investment style of individual hedge funds and fund of funds. This approach is based on a mixture of the style analysis approach suggested by Sharpe [1988], the factor push approach used in stress testing, and historical simulation. The parameter estimates from this model are inputs in the Value‐at‐Risk analysis for a sample of 2,934 funds over the 1994–2000 period. The in‐sample and out‐of‐sample results suggest that the proposed approach is useful and may constitute a valuable tool for assessing the investment style and risk of hedge funds.
The Asian financial crisis revealed the weaknesses of Malaysian fund management industry. The financial losses incurred in the crisis brought forward the issue of asymmetric…
Abstract
Purpose
The Asian financial crisis revealed the weaknesses of Malaysian fund management industry. The financial losses incurred in the crisis brought forward the issue of asymmetric information between the fund managers and investors i.e. the mismatch between the investors’ investment objectives and funds’ profiles. This paper aims to demonstrate the usefulness of the new framework in mitigating the above problem.
Design/methodology/approach
This paper advocates an integrated framework of style analysis, i.e. using strong‐form of style analysis by Sharpe – a multi‐indexed benchmark for estimating the investment style of the unit trust funds, and using the weak‐form of style analysis by Amenc, Sfeir and Martellini, to measure the risk‐adjusted performance of the funds with alpha and selection return.
Findings
This study concludes that: First, the inclusion of asset classes with negative correlation coefficient enhances the performance of funds. Second, funds with relatively high degree of style (above 70 per cent) that hold large‐cap stocks together with high portion of liquid asset class (6‐35 per cent) tend to have higher alpha, translating into higher information ratio. Third, index funds have the lowest information ratio, implying that these funds are not actively managed compared with others.
Research limitations/implications
This paper discovers a possible trend of misclassification as the degree of styles for index funds does not differ from the other fund types. Future researchers can look into the issue of misclassification of fund objectives for the existing unit trust funds.
Practical implications
This paper highlights the importance of the equity style management in bridging the gap between emerging capital markets and developed markets. One of the conclusions highlighted in the paper is the creation of new indices for different asset classes. Asset management companies are also advised to improve their disclosure in their annual reports to mitigate the issue of asymmetric information between fund managers and investors.
Originality/value
To the author's knowledge, this empirical work using integrated framework style analysis is the first of its kind on Malaysian unit trust funds. This paper is particularly useful to regulators of emerging capital markets and asset management companies.
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Praveen K. Das and S.P. Uma Rao
The purpose of this paper is to evaluate the performance of socially responsible funds by closely examining funds' investment styles.
Abstract
Purpose
The purpose of this paper is to evaluate the performance of socially responsible funds by closely examining funds' investment styles.
Design/methodology/approach
The authors apply William Sharpe's method of style analysis to evaluate the performance of 94 US socially responsible mutual funds. By using the fund style as a benchmark, the authors are able to separate the performance attributed to style and selection.
Findings
The authors observe that underperformance of socially responsible funds is more pronounced and common than identified in the previous literature. Proponents of socially responsible investing argue that screening process provides an opportunity to fund managers to identify best companies in terms of future financial performance. The paper finds that active management of mutual funds is an important determinant of their performance in socially responsible investing industry. This paper provides evidence supporting that active management of socially responsible funds add value.
Originality/value
This study will help investors in allocating their portfolios among many of the available SR funds. The result – actively managed SR funds outperform their passive counterparts – will be valuable for those investors who are willing to invest in socially responsible funds but are concerned about the financial performance.
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Mahfooz Alam and Valeed Ahmad Ansari
This paper investigates the style timing and liquidity style timing vis-à-vis the market, size, value and momentum factors of the actively managed Indian equity mutual funds.
Abstract
Purpose
This paper investigates the style timing and liquidity style timing vis-à-vis the market, size, value and momentum factors of the actively managed Indian equity mutual funds.
Design/methodology/approach
We examine the style timing of the funds using the augmented Carhart four-factor model by incorporating timing measures (Treynor and Mazuy; Henriksson and Merton). Based on this, the study explores the four-factor liquidity and volatility style timing exhibited by fund managers. The sample is from April 2000 to March 2018 and spans the volatile 2008 subprime economic crises. The sample comprised 182 actively managed equity funds from various sizes and was considered to be a well-diversified sample.
Findings
The results of our study provide strong evidence of market liquidity timing in India. No other style timing skills are observed in our analysis. Our results also imply that the fund managers might misidentify size timing as market timing if integrated liquidity timing measures are not employed, leading to false conclusions.
Research limitations/implications
The findings of our study imply that the fund managers might misidentify size timing as market timing if integrated liquidity timing measures are not employed, leading to false conclusions.
Originality/value
This study, to our knowledge, is the first attempt to investigate the portfolio-based style timing in the Indian context.
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