Research | Projects

ACTIVELY MANAGED FUNDS, OVECONFINDENCE, AND HOME BIAS

The first step of the study consists in analysing the impact of active management styles on portfolios' risk-return profiles, in a country specific (the BRIC market area) and in theintegrated context.This requires a rigorous definition of active management, which is preliminary intended as an investment policy focusing on specific assets/styles.It should be noted that alternative views do exist, as activism can be also qualified in terms of market timing: so called feedback traders or noise traders manage their portfolio decisions overwhelmingly on market signals observed in recent price changes, rather than fundamental values. The timing approach to active investment is mostly fruitful for analysing the volatility (see Chau et al. 2008) and serial correlations (see Laopodis 2005, and Laopodis 2008) of asset returns. Anyway this approach is beyond the scope of this study.Our agreed notion of "focused portfolio" is indeed difficult to be translated immediately into actual measures which can be observable in actual fund portfolios and it needs obviously to be confronted with the relevant related literature as the focusing can involve different portfolio (risk) factors.A preliminary analysis involves the standard statistical measures of concentration, which can be financially augmented in terms of portfolio distance from a diversified local benchmark and in terms of the (opposite notion of) portfolio style breadth.A second step of the analysis involves pairing methods and results of active management with the overconfidence and home bias theory, intended here as hidden (and new) drivers for active asset allocation decisions. The objective of this part of the study relies in testing and understanding whether the lack of diversification is the consequence of actual managerial skills generating a positive alpha, or it is determined by managers overestimating their private (local) information and their self-ability to beat the market.Specifically, as the tests are implemented with regards to funds targeting the BRIC area, we also analyse the impact on performance of domestic focused portfolios. The home bias component is relevant to the scope of the study as it might augment the overconfidence effect, due to an emotional commitment on behalf of local managers.This analysis will be carried on by contrasting fund returns with local and global index returns. On average passive funds are assumed to replicate the market and therefore their returns are well explained only by local index. We will therefore contrast local managers, with non-local ones, self-declared geo-focused on the local market. With this method, we will be able to uncover and measure overconfidence biases where local managers are more tied to local indices then managers explicitly geo-focused on those indices.To date, there has been very little research concerning actively focused portfolios with respect to emerging markets, besides, behavioural implications are rather unexplored.Specifically the comparison of locally actively managed funds and geo-focused funds is absolutely new in this context.