Active Investing in BRIC Countries

Antonio Fasano, Giuseppe Galloppo

Abstract


Purpose. The paper analyses the impact of active management styles on portfolios’ risk-return profiles, in a country specific — the BRIC market area — and in the integrated context. Our aim is to see how and if the local and global results differ and if we can outline a BRIC specific consistent behaviour.

Methodology. First, we identify formally the notion of active management as an investment policy focusing on specific assets/styles; therefore we measure this concentration a) in terms of the portfolio distance from a diversified index and b) with respect to the (opposite notion of) portfolio style breadth. Given these assumptions, to test empirically how the active policies affect the fund performances we propose to use the R-square as a diversification reverse proxy. The rationale behind is that the more the fund’s tracking error the more the fund wealth is focused on a given industry or sector, and therefore on few assets, deviating from a passive portfolio strategy replicating the benchmark. Thereafter we propose to reimplement Grinold’s qualitative notion of breadth. To approximate the breadth of the fund strategies, we consider the number of factors in a predictive model to which the funds are exposed. In particular, with a factor model we investigate whether being exposed to multiple factors simultaneously is important for improving performance. Finally we assess the impact of the local risk factors, by ranking local/global portfolios through the Spearman correlation of both symmetric (Sharpe ratio) and asymmetric (Sortino-Satchel ratio, Farinelli-Tibiletti ratio) risk measures.

Results. The main finding of the paper is that, contrary to similar works, not related to BRIC markets, we do not find a sound relationship between concentration and performance. This is true whether we measure the concentration in terms of higher tracking error levels or we consider portfolio concentration in terms of breadth of strategies. Based on these findings, investors called for picking for best-performing funds should take into account that the Fundamental Law of Active Management is not always true in BRIC context.

As for the impact of local risk factors the rank correlation analysis between the local risk benchmark and global risk index, shows that there are some specific local factor effects coupled to the change of ratios’ benchmark. We also find that Farinelli-Tibiletti ratio, among our RAP measures, is the one exhibiting more consistent behaviour for the cross-country ranking analysis.

 

The theoretical contribution. Some original, while grounded in the literature, approaches are introduced with respect to the study of active investment policies. Results are presented contrasting the BRIC regions with the global context, which might add new evidence to the literature of domestic CAPM and helps identifying BRIC pricing behaviours.

Practical implications Traders and portfolio managers committed to active investment strategies can find new evidences concerning the implications and formal effects of these policies, particularly with respect to BRIC or BRIC focused funds.

Keywords: BRIC Markets, Active Investment, Performance, Alpha, Risk.

Paper type: Research paper.


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