Predictive Power of Brazilian Equity Fund Performance Using R2 as a Measure of Selectivity

Accounting & Finance Review, Vol. 28, No. 74, p. 282–296, 2017

Posted: 20 Apr 2017

See all articles by Marcelo Guzella

Marcelo Guzella

University of São Paulo (USP)

Carlos Heitor Campani

The COPPEAD Graduate School of Business - Federal University of Rio de Janeiro (UFRJ)

Date Written: April 18, 2017

Abstract

This paper aimed to investigate the impact of levels of selectivity on the performance of equity funds using a methodology applied for the first time ever in the Brazilian market. As an indicator of the activity level of a fund, we proposed the coefficient of determination (R2) of the regression of its returns over market returns. In total, 867 funds were analyzed in the period between November 2004 and October 2014. The hypothesis tested is that more selective funds perform better to compensate for their higher operating costs. This hypothesis was confirmed in the Brazilian market. Dynamic equally-weighted portfolios of funds were simulated, according to their past R2 and alphas, with monthly rebalancing and 12-month moving windows. The portfolio of the most selective funds had a Sharpe ratio of 0.0494, on a monthly basis, while the portfolio of the least selective funds had a Sharpe ratio of -0.0314. Performance was also higher in evaluations involving excess returns, Jensen’s alpha, and accumulated returns, as well as when compared to randomly selected portfolios. Moreover, past performance (as measured by Jensen’s alpha) was also a predictor of future performance.

Keywords: Selectivity of Equity Funds, Financial Brazilian Market, Predictive Power, Sharpe Ratio, Jensen's Alpha

JEL Classification: G11

Suggested Citation

Guzella, Marcelo and Campani, Carlos Heitor, Predictive Power of Brazilian Equity Fund Performance Using R2 as a Measure of Selectivity (April 18, 2017). Accounting & Finance Review, Vol. 28, No. 74, p. 282–296, 2017, Available at SSRN: https://ssrn.com/abstract=2954713

Marcelo Guzella

University of São Paulo (USP) ( email )

Rua Luciano Gualberto, 315
São Paulo, São Paulo 14800-901
Brazil

Carlos Heitor Campani (Contact Author)

The COPPEAD Graduate School of Business - Federal University of Rio de Janeiro (UFRJ) ( email )

Rua Pascoal Lemme n. 355
Rio de Janeiro, 21949-961
Brazil

HOME PAGE: http://www.coppead.ufrj.br

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