Industry Competition and Performance Persistence in Brazilian Equity Mutual Funds

Silva, Sabrina Espinele da; Pereira, Leticia Fernandes; Fonseca, Simone Evangelista; Iquiapaza, Robert

doi:10.15728/bbr.2022.19.3.3.en

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Article • BBR, Braz. Bus. Rev. 19 (3) • May-Jun 2022 • https://doi.org/10.15728/bbr.2022.19.3.3.en copy

Industry Competition and Performance Persistence in Brazilian Equity Mutual Funds

Authorship SCIMAGO INSTITUTIONS RANKINGS

ABSTRACT

The Brazilian mutual fund industry, despite having a high increase in net worth, is concentrated around a few large administrators. Therefore, it is worth questioning the extent to which this level of concentration can affect the performance delivered to the shareholders, as greater concentration implies less competition. In this way, this research aimed to analyze the impact of market competition on the performance persistence of equity mutual funds in Brazil. Using a sample of free portfolio equity investment funds from 2010 to 2019, the main results point to the existence of performance persistence for Brazilian free portfolio equity funds. Furthermore, they pointed out a positive and statistically significant relationship between the level of competition and the performance of funds, as well as in the interaction between competition and performance persistence. Consequently, indicating that, funds with greater performance persistence tend to maintain this persistence even in the face of greater industry competition.

KeyWords:
Performance; Competition; Investment Funds; Alpha

Author	Year	Object of Study	Main Results
Keswani and Stolin	2006	Fund Industry	Market segments with higher concentration - less competition - showed greater persistence of performance.
Wahal and Wang	2011	Fund Industry	They showed that strong competition tends to cause a reduction in management fees and fundraising. In addition, they showed that competition is negatively associated with fund performance and relates to fund survival rates.
In et al.	2014	Fund Industry	They observed that an increase in competition positively affects the performance of socially responsible funds. In addition, 12b-1 fees, which represent distribution expenditures such as marketing, and expense ratios showed a positive relationship with competition.
Parida and Tang	2017	Fund Industry	They found evidence that funds in less competitive market segments outperformed compared to segments that are more competitive. Moreover, funds charge higher fees in more competitive market segments, which was justified by the authors based on the strategic fee-setting hypothesis proposed by Christoffessen and Musto (2002).
Hoberg et al.	2018	Fund Industry	The study showed that alpha tends to be lower as the degree of competition increases; furthermore, it showed that performance persistence is significantly stronger in less competitive markets.
Ferreira et al.	2019	Fund Industry	They highlighted that competition is a potential determinant of performance persistence, as it affects how funds that are performing better and/or worse will perform in the future. The authors point out that greater competitive pressure make it more difficult for funds to remain top performers.
Leippold and Rueegg	2020	Fund Industry	They could not reject the hypothesis that the alphas achieved by most funds were statistically equal to zero. They considered that the fund industry is highly competitive and argued for competitive equilibrium.

		Minimum	1º quartile	Median	Mean	3º quartile	Maximum
Fund return	a.m.	-16,25%	-1,69%	1,05%	1,03%	3,79%	17,66%
Ibovespa	a.m.	-24,80%	-3,39%	0,71%	0,81%	4,84%	16,97%
Selic	a.m.	0,29%	0,57%	0,80%	0,77%	0,95%	1,213%
α	a.m.	-16,26%	-0,53%	0,11%	0,10%	0,75%	11,80%
FEE	a.a.	0,00%	0,49%	1,50%	1,44%	2,05%	8,50%
SIZE	ln	15,4300	16,6300	17,5500	17,6400	18,5100	22,1600
SIZEFAM	ln	15,5100	24,3300	25,6000	25,2100	26,5000	27,5400
AGE	years	0,0000	3,0000	5,0000	5,6250	7,0000	39,0000
HHI	monthly	-0,2143	-0,2000	-0,1898	-0,1865	-0,1782	-0,1378
HHI	yearly	-0,2070	-0,2026	-0,1906	-0,1901	-0,1882	-0,1436
N° funds in the sample							1082
N° of families							46

	α	FEE	AGE	SIZEFAM	SIZE	HHI
α	1,000
FEE	-0,059
AGE	-0,129	0,208
SIZEFAM	0,096	-0,009	-0,013
SIZE	0,097	-0,177	0,071	0,223
HHI	0,086	0,000	-0,056	-0,044	0,014
α_t-1	0,240	-0,050	-0,144	0,082	0,133	0,060

Variável Dependente - α
	(1)	(2)	(3) ^(a)	(4) ^(a)
α_t-1	0,201^***	0,218^***	0,188^***	0,154^***
	(0,013)	(0,013)	(0,022)	(0,024)
HHI	0,065^***	0,062^***	0,101^***	0,099^***
	(0,014)	(0,014)	(0,022)	(0,021)
AGE	-0,0002^***	-0,0002^***	-0,0002^***	-0,0002^***
	(0,00004)	(0,00004)	(0,0001)	(0,0001)
SIZE	0,0003^**	0,0003^**	0,0005^**	0,0005^**
	(0,0001)	(0,0001)	(0,0002)	(0,0002)
SIZEFAM	0,001^***	0,001^***	0,0005^***	0,0004^***
	(0,0001)	(0,0001)	(0,0002)	(0,0002)
FEE	-0,0003^**	-0,0003^**	0,00002	-0,000002
	(0,0001)	(0,0001)	(0,0003)	(0,0003)
HHI ^* α_t-1 ^(b)		5,753^***		-5,400^***
		(1,002)		(1,652)
Constante	-0,005	-0,006	0,002	0,002
	(0,004)	(0,004)	(0,008)	(0,008)
Observations	5.277	5.277	1.832	1.832
R² adjusted	0,075	0,080	0,075	0,080
F-statistic	72,201^***	66,975^***	24,595^***	22,720^***

Variável Dependente - α
	Subperíodo 1		Subperíodo 2
	(1)	(2)	(1)	(2)
α_t-1	0,255^***	0,263^***	0,170^***	0,157^***
	(0,018)	(0,018)	(0,019)	(0,017)
HHI	-0,023	-0,002	0,106^***	0,104^***
	(0,022)	(0,022)	(0,019)	(0,019)
AGE	-0,0004^***	-0,0004^***	-0,0001^**	-0,0001^**
	(0,0001)	(0,0001)	(0,00005)	(0,00005)
SIZE	0,0004^**	0,0004^*	0,0003	0,0003
	(0,0002)	(0,0002)	(0,0002)	(0,0002)
SIZEFAM	0,001^***	0,001^***	0,0003^**	0,0003^**
	(0,0001)	(0,0001)	(0,0001)	(0,0001)
FEE	-0,001^**	-0,001^**	-0,0001	-0,0001
	(0,0002)	(0,0002)	(0,0002)	(0,0002)
HHI ^* α_t-1	9,271^***		2,355
	(1,426)		(1,440)
Constante	-0,029^***	-0,025^***	0,009	0,009
	(0,006)	(0,006)	(0,006)	(0,006)
Observations	1.920	1.920	3.357	3.357
R²	0,185	0,167	0,046	0,045
Adjusted R2	0,182	0,165	0,044	0,043
F Statistic	62,115^***	64,037^***	22,888^***	26,244^***

Variável Dependente - α
	EQ < Q(25%)		Q(25%) < EQ < Q(75%)		EQ > Q(75%)
α_t-1	0,155^***	0,119^***	0,257^***	0,249^***	0,181^***	0,164^***
	(0,029)	(0,028)	(0,017)	(0,017)	(0,024)	(0,023)
HHI	0,085^**	0,064^*	0,052^***	0,053^***	0,058^**	0,071^***
	(0,036)	(0,036)	(0,019)	(0,019)	(0,024)	(0,024)
AGE	-0,0002^**	-0,0002^**	-0,0002^***	-0,0002^***	-0,0001	-0,0001
	(0,0001)	(0,0001)	(0,0001)	(0,0001)	(0,0001)	(0,0001)
SIZE	-0,002^**	-0,002^**	-0,002^***	-0,002^***	-0,001^***	-0,001^***
	(0,001)	(0,001)	(0,0004)	(0,0004)	(0,0004)	(0,0004)
SIZEFAM	0,0004^**	0,0004^**	0,001^***	0,001^***	0,001^**	0,001^**
	(0,0002)	(0,0002)	(0,0001)	(0,0001)	(0,0002)	(0,0002)
FEE	-0,0001	-0,0001	-0,001^**	-0,001^**	-0,0002	-0,0003
	(0,0003)	(0,0004)	(0,0002)	(0,0002)	(0,0003)	(0,0003)
HHI ^* α_t-1	11,182^***		3,629^***		4,227^**
	(2,394)		(1,341)		(1,826)
Constant	0,042^**	0,038^**	0,024^***	0,025^***	0,020^*	0,023^**
	(0,019)	(0,019)	(0,008)	(0,008)	(0,010)	(0,010)
Observations	1.219	1.219	2.621	2.621	1.437	1.437
R2	0,054	0,037	0,117	0,114	0,060	0,056
Adjusted R2	0,048	0,032	0,114	0,112	0,055	0,052
F Statistic	9,799^***	7,663^***	49,329^***	56,194^***	13,000^***	14,230^***

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