How Industry Concentration Influences the Performance of South African General Equity Funds
Master Thesis
2018
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University of Cape Town
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Individual investors can invest in equity either through trading accounts provided by financial institutions or in equity funds with a fund manager. Fund managers will make different investing decisions that either negatively or positively influence the performance of the funds that an investor chooses to invest in. One such decision is the concentration of the fund in different companies, countries and industries. This research aims to determine how industry concentration influences the performance of South African general equity funds. Concentration is calculated using the industry concentration index formula. Over the period from 2006 to 2017, a mixed model regression, which accounts for both fixed and random effects, is used to determine the impact of concentration on fund performance. A random effect model was used as it models the variability between funds. The fixed effects that were controlled for in the model are concentration, the fund size, the gender and number of managers and the current market cycle which indicates whether the market was experiencing a financial crisis or not. The regression model is run over two models, each with two stages. Model 1 and Model 2 differ in that Model 1 includes year and quarter data as one fixed effect for time. In Model 2, the year and the quarter are included as two separate fixed effects. Stage 1 and Stage 2 differ in that Stage 1 does not consider management team variables while Stage 2 considers all variables. This research differs from prior research by considering the impact of concentration in specific industries as well as accounting for whether the market was experiencing a financial crisis or not. This research concludes that industry concentration can economically impact the performance of South African general equity funds and that, whether this impact is positive or negative depends on the industry in which the fund is concentrated.
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Morton, B. 2018. How Industry Concentration Influences the Performance of South African General Equity Funds. University of Cape Town.