An Empirical Investigation of the Performance of Fund Managers in Pakistan
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Abstract
This study aims to determine the stock selection ability and market timing ability of mutual fund managers, focusing on conventional funds and Islamic funds in Pakistan. Although there has been significant growth in the number and assets of mutual funds in recent years, few studies measure the performance of mutual funds managers. The scarcity of existing literature motivates this study. In this study, two models are used to measure the stock selection and market timing on a sample of conventional mutual funds and Islamic mutual funds over 2010 and 2019 using annual returns. Overall, the results indicate that the performance study of conventional mutual funds and Islamic mutual funds indicates that manager performance is not superior in all three portfolios, i.e., conventional funds, Islamic funds, and overall funds in over sample period. This also indicates that both Conventional and Islamic fund managers do not outperform the market (KSE 100 index). Thus, there is a lack of market timing ability. Using Tranoy and mazuy and Jansen models found a lack of stock selection and market timing ability of mutual fund managers in Pakistani mutual funds. In this study, I have applied only two models to examine both the timing and selection ability of conventional and Islamic Pakistani equity funds. For future possibilities, the study suggests adopting several methods and approaches like the TMFF3 model and HM-FF3 model, making the study more comprehensive and accurate than this research.
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Sanaullah Sanaullah, The Islamia University of Bahawalpur, Pakistan.
Department of Management Sciences.
Amna Noor, The Islamia University of Bahawalpur, Pakistan.
Department of Management Sciences.
Saleh Nawaz Khan, The Islamia University of Bahawalpur, Pakistan.
Department of Management Sciences.
Muhammad Shahbaz Khan, The Islamia University of Bahawalpur
An Investigation of Market Timing Ability of Mutual Fund Managers in Pakistan
1Sanaullah, 2Muhammad Shahbaz Khan 3 Dr Amna Noor 4 Salleh Khan
1The Islamia Unversity of Bahwalpur, Pakistan, sanaullah.iub@gmail.com
2 The Islamia Unversity of Bahwalpur, Pakistan, muhammadshahbazkhan7@gmail.com
3 The Islamia Unversity of Bahwalpur, Pakistan, damnanoorch@gmail.com
4 The Islamia Unversity of Bahwalpur, Pakistan, sallehkhan@yahoo.com
ABSTRACT
The main objective of this thesis is to provide a detailed analysis of stock selection ability and market timing ability of mutual fund managers with particular focus on conventional funds and Islamic funds in Pakistan. Although there has been a significant growth in the number and assets of mutual funds in recent years but there are few studies which measure the performance of mutual funds managers. The scarcity of existing literature provides motivation of this study. In this thesis two models are used to measure the stock selection and market timing on a sample of conventional mutual funds and Islamic mutual funds over the period 2010 and 2019 using annual returns. Overall, the results indicates that the from the performance study of conventional mutual funds and Islamic mutual funds indicate that manager performance is not superior in all three portfolios I.e conventional funds, Islamic funds and overall funds in over sample period. This also indicate that both Conventional and Islamic fund managers do not outperform the market (KSE 100 index). Thus, there is a lack of market timing ability. By using Tranoy and mazuy and Jansen models we founds lack of stock selection and market timing ability of mutual fund managers in Pakistani mutual funds.
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Keywords
Mutual Funds, Stock Selection Ability, Market Timing Ability
JEL Classification
.
Corresponding author’s email address: sanaullah.iub@gmail.com
5. 1. IntroductionThe mutual fund industry has achieved a tremendous growth over the last some years. The worth of mutual funds in the world under management enhanced from $22.7 trillion in 2007 to $40.4 trillion at the end of 2016.Mutual funds perform an act as a significant role in developing the state’s economy and keeping it stable. The steady growth of mutual funds can be seen over the world which is because of diversified portfolio. Mutual fund plays a vital part for the consistent developing of economy by improving the efficiency, stability, transparency and inclusion. Mutual funds are ever-changing financial institutions which perform an important role in an economy by mobilizing savings and investing them in the capital and money markets. Mutual funds, thus act as intermediate. They mobilize funds in the savings market and act as complementary to banking industry. They also compete banks and other financial organizations. This part becomes much stronger in the developing economies like Pakistan where the potential investors do not have such investment knowledge, information, and facilities to invest in the capital or money markets. And also they do not have risk power for direct investments in risky stocks. So, they have to rely on those who have this knowledge and aptitude to earn more profit. Mutual funds provide them such opportunity by providing them professional management.
The investment performance of mutual funds becomes very crucial in Pakistan because this industry in flourishing at a rapid pace in Pakistan and one way of performance evaluation is identification of successful fund managers as investors rely on mutual fund managers because of their professional management. Identification of successful fund managers is based on following methods.
- Stock Selection: This ability involves microforcasting and identification of the up and down of prices of individual stocks in relation to market and the selection of overpriced/underpriced stocks in general.
- Market Timing: This ability involves macroforcasting and refers to correctly guess the movement of market whether bull or bear and changing portfolio consequently.
The mutual funds industry has shown remarkable growth in Pakistan over the last some years. The value of mutual funds in Pakistan was 273 billion rupees by the end of financing year 2018 but these assets were only 332883 million in 2013(MUFAP Fund Statistics).
A mutual fund is a kind of financial vehicle made up of a pool of money gathered from some investors to invest in securities such as stocks, bonds, money market instruments, and other assets. Mutual funds are run by professional money managers, who assign the fund's assets and try to produce capital gains or income for the fund's investors. There are many kind of mutual funds ranging from equity, bond, and money market funds but here we discus only two types open ended equity mutual fund, 1) conventional mutual fund and 2) Islamic mutual fund.
The conventional mutual fund can be invested in stock and bonds as well investment can be redeemed any time. There is higher risk and higher exception of return in conventional mutual funds. Whereas Islamic mutual funds cannot be funded in bonds, they are funded in accordance with Shariah, which purely fallows Islam. In case of Islamic mutual funds there is lower risk but also lower expectations for return and growth. According to Hoepner, Rammal and Rezec, (2011) there is more growth and development in Islamic mutual funds market as compare to conventional markets more, Islamic mutual fund are more competitive to international equity bench mark. Whereas, the conventional funds underperformed the market. Previous study on the mutual funds is also based on the conventional funds. The current study adds in the literature of mutual fund by considering both conventional and Islamic Mutual funds.
1.2 Research ProblemOne of the major reasons for investing in actively managed equity funds is that the fund manager upon choosing stock, actually manage to beat the market. This means the mutual funds generates more returns then its underlying benchmark. For that excess return investors are ready to pay higher cost for fund management. The previous literature has found a little evidence of market timing ability of fund managers. It is very difficult for investors to select those fund managers who can reliably beat their bench mark because most of the investors are not financially literate. So this is the biggest problem the investors faces while choosing the mutual funds. So the intent of this study is to measure the performance of mutual funds managers in Pakistan. Our findings will educate the investors regarding the fund selections.
1.3 Research GapMutual fund performance remains the interest of the academic researchers all the times. The question whether the fund managers out-perform the market or not remains the hot topic in mutual fund literature. Despite the boosting investigations, because of data accessibility and reliability a great sum of research has been done in developed countries instead of developing countries. Therefore the evaluation of fund managers in developing countries has not been depicted in details and needs to be addressed more. Pakistan has emerging mutual fund market with assets under management over 552 billion and lots of fund are in top 100 mutual funds in the world. But unfortunately no previous research has evaluate the performance of mutual fund managers in Pakistan which is lack of exploration until know. The uniqueness of the study is that we will also evaluate the performance of shariah complaint funds managers for very first time in literature. The previous researches were evaluating the performance of conventional fund managers. The Islamic financial markets have achieved an enormous growth over the last few years. The Islamic mutual funds have different characteristics then conventional funds, because of its shariah complaint investments, so it is also vital to evaluate the performance of Shariah complaints fund managers. This research also fills this prevailing gap in literature.
1.4 Significant of studyInvestors will need information which will enable the performance of the fund and the fund managers to be evaluated. Investors need information upon both the timing and selection ability of mutual fund managers in Pakistan. This research will provide that information to investors. This study can be expected to provide a benchmark research of mutual fund performance in Pakistan especially for mutual fund, which will enable Pakistani fund managers to evaluate the performance of funds under management, included reporting of timing and selection ability, as a consequence, contribute to the efficient development of Pakistani financial markets. This study is accepted to provide information to future financial market entrants in Pakistan. Our study will helpful for investors to select those fund managers who can reliably beat their bench mark because most of the investors are not financially literate.
1.5 Scope of the studyThe research is conducted on the conventional and Islamic mutual funds. The present research includes the equity funds in the Pakistan. Result from the research may be applicable on open ended equity mutual funds in Pakistan. This research is limited only in Conventional and Islamic funds in Pakistan. Use only the Treynor and Muzay model and Jensen model as a total to investigate both market timing and stock selection ability of mutual fund managers in Pakistan.
1.6 Research ObjectivesFollowing are the objective of the study.
- To examine the stock selection ability of fund manager in Pakistan.
- To examine the market timing ability of fund manager in Pakistan.
Based on the above perspective, this paper aims to answer the following research questions:
- What is the stock selection ability of fund managers in Pakistan?
- Is the market timing ability of fund managers in Pakistan?
Among the essential investment techniques that are managed by different managers are mutual funds. They can be termed as the financial investment products that are professionally managed (Sattar, 2016). The mutual fund companies attempt to gather funds from different investors after which the collected funds are invested in the financial market products such as bonds, stocks, and other products of money market. According to the study of Bogle (2015), the mutual funds hold significant importance for the people who are looking to invest their money and do not possess knowledge and skills of the products and dynamics of the financial market products. On the other hand, the study of Arifin (2018) indicates that the people who do not have time to continuously keep an eye on the development of the financial markets can also choose mutual funds as the right option.
Similarly, the mutual funds can also be thought of as dynamic financial institutions that are greatly important for an economy as they mobilize investments and savings in the money as well as the capital markets (Mansor, Bhatti and Ariff, 2015). Hence, they are thought of as an intermediary. In this way, they also act as a complementary to banking industry due to which mutual funds also act as a competition for the financial institutions. Furthermore, it can be known for the study of Kaminsky, Lyons and Schmukler (2001) that this role of the mutual funds becomes more vital for the economies that are in the process of development. The main reason for this is that the developing markets comprise of many small investors who do not have the facilities, tools, expertise and knowledge to utilise capital or money markets for investment purposes. For this reason, these investors need someone who has the required knowledge and skills to make them earn on their investment. Mutual funds provide this opportunity for the prospective investors.
2.3 Islamic Mutual FundsThis is an area of research that has been receiving a significant amount of consideration from the researchers. Investment or financing activities in Islam are governed by the principles laid down by Shariah. The sector has gone through areas of development in majority Muslim states as they provide a Shariah compliant way of investment (Boo, Ee and Rashid, 2017). The international markets have also realized the importance of this form of funds and have started to take advantage of it. According to Hassan and Girard (2010), many different international financial institutions have started to get involved in emerging market by introducing mutual funds that are Shariah compliant, such institutions include HSBC, Morgan, Barclays, Stanley, Merrill Lynch, and Citibank
So the Islamic financial services value was around $150 billion during the mid-90s but since then it has experienced phenomenal growth and grew at the rate of 14% annually till 2007. The Shariah compliant funds have been growing enormously; a double-digit growth is being experienced by them to be precise. By late 2011, at the value of around $1.4 trillion dollars, they indicated the enormous size of the industry. The study of Ahmed and Soomro (2017) show that the concept of an Islamised mutual fund is still demand driven with a limited investment option as it is a concept which is currently in its growth phase. Sukuk, which is a type of an Islamic bond, upon its introduction has fuelled the development of Islamic management sector but the majority of the Shariah compliant funds are those of equity, fiancé and commodity-based funds. The study of Ahmed and Soomro (2017) has revealed that the Sukuk has grown from zero in 1996 to a collective of $350 billion dollars in the middle of 2012. The literature has indicated that the Islamic mutual funds have not only gained traction in the Muslim states but also in different international markets and it can still be characterized as the industry that is growing rapidly.
Shariah Supervisory Board of Islamic index of Dow Jones for example, bear those corporations whose total liabilities, sum of cash and securities reaping interest benefit and accounts receivable are below one-third of company’s market capitalization. (Dow Jones, 2009). Similar ratios are being used by other Islamic indices (Derigs & Marzan, 2008). Most notably, one of the studies indicated that Shariah compliant indices deliver lesser financial return than the conventional indices. Analysis of Forte & Miglietta (2007) emphasized on the unique characteristics of investment in compliance with Islamic rules as FTSE Islamic indices are not observed in this.
2.4 Managers of Mutual Funds: What brings about their Performances?How these funds show their performance is one of the most sought-after subjects when it comes to financial literature. The mutual funds provide an effective way to the investors for the purpose of generation of income, appreciation of capital and diversification advantages (Jensen, Johnsonand Washer, 2018). The mutual funds hold importance for the investors as they even allow the investors with little or no market knowledge to gain benefits of professional management of capital. When selecting the intents of these funds what should be kept in mind is how much risk it can pose to the investors that is the risk tolerance as well as his time horizon. The managers of the funds must carry out selection of the securities or funds in regard to the investment objectives selected by the investors (Bryant and Liu, 2010). However, the fund managers seem to deviate from the objectives while making investments and misclassify the funds which can also be seen as a marketing tactic carried out for the purpose of managing funds with losses. The main reason for this can be that the investors do the selection of funds based on the historical performance and not on the actual investing activities due to which the fund managers may offset the losses incurred by misclassifying the objectives of funds (Bams, Otten and Ramezanifar, 2017). Based on this, the literature has shown that the manager can try to record standard of performance, reacquire the previously incurred losses or try to follow the herd to imitate the funds that are successful. The study of Walter and Weber (2006) has shown the above discussed herding strategy of the managers of mutual funds with regards to Germany.
Past decades have experienced an overwhelming discussion on the accomplishments of the managers and also on factors that have a significant effect on performance of fund. The researchers have varying opinions on the performance of these managers. Sharpe (1966) and Jenson (1968) propose that the attempts of the beating the market by managers have been refuted whereas the study of Yang and Liu (2017) has mentioned that it is not applicable to those managers of the Chinese market as they are capable of beating the market. However, there are some authors who have a different opinion on this matter, and they propose that how managers perform can be positively persistent (Wermers, 2000; Dulta, 2002; Vidal-García et al., 2016; Pandow, 2017). Apart from these studies, the literature has mentioned some other important factors that are needed to be examined in order to study how the managers perform. For example, Kacpercyk (2005) and Baer (2006) propound that family cross subsidisation elements, imitating funds with top performance, concentration of industry funds, management structure as well as managers’ timing influence how these funds perform. One of the qualities that impacts the performance of mutual funds is the difference in decision making skills. Ding and Wermers (2005) have highlighted that experience is essential for the success and performance and studied have indicated that experienced manager have performed better than less experienced because they understand the market well.
Furthermore, it is apparent from studies that an existence of star fund in the portfolio of the managers also affects the other funds in the family which receive a positive spill over from the existence of a star fund. A superior performing one for that matter (Chen and Chang, 2018). For the increase the inflow of the funds there are investment companies that promote these funds. Hence by employing different structure of management, the investment funds can optimize the accomplishment of funds that can occur as risk exposure or volatility of return or in the form of risk adjusted returns. The literature has also identified that the managers, in the process of increasing the performance of their funds, increase the style drift or the level of risk following the period of bad performance of a fund. Due to this reason, an increase in the level of risk or style drift may indicate the incompetence of the manager managing the fund. Nevertheless, a study by Brown and Harlow in 2006 mentioned that those funds having an amplified style drift may perform well as compared to their peers in the time of recession. This is because the increase in the exposure of a mutual fund to risk may result from other factors also. For instance, the study of Boguth and Simutin(2018) has elaborated that the desire of the manager to gather trading profits may also expose the mutual fund to increased risks. The review of the literature carried out in this section has revealed various conflicting viewpoints on the performance of managers and the factors which could have influenced the mutual fund managers’ performance. Therefore, this can be inferred that performance from a joint or mutual fund manager is influenced by factors that may differ in different markets and environments as there is no consensus among researchers on particularity of aspects which affect the performance of these fund managers.
2.5 Stock Selection Ability of Mutual Funds ManagersIncreasing popularity of the mutual funds has made the evaluation of the performance of the mutual fund managers a fundamental challenge for the academicians as well as for the practitioners (Bu, 2019). There are a considerable number of studies present which were conducted in this regard, examining how the investments have performed in the managed portfolio. According to Kaur (2017), the studies in the literature that have presumed the stability of the risk involved in the investment can said to have focused on the aptitude of executives or managers for selecting the best stock options in portfolio. So from the perspective of investor’s two aspects are there from which he can analyse the performance of mutual fund manager first is market timing ability and second is stock selection ability. Stock selection process deals with micro forecasting and predicting about the movement of stock with respect to the market whether certain stock will go up or down all comes under that and also whether certain stock is overvalued or undervalued. The selection of stock is the manager’s ability to choose a specific portfolio of stocks in a way that it provides the expected return to the investors. The most important ability in a mutual fund industry is the ability, capability, analysis and aptitude for selection of stock by the managers, this has been a matter of importance for the researchers present all over the world.
The study put forward by Butt, Khursheed and Pandow (2013) has elaborated that the foundation of studies, research and other works on the performance evaluation of the funds was carried out by Sharpe in the year 1996, who designed a measure of performance and found in his study that these joint or mutual funds’ markets below the level of the industry performance. However, in contrast to this study, the research of Jensen (1968) discovered with a research sample of 115 funds that these executives, supervisors or managers were not able to accurately forecast the price of the securities. Another study carried out by Chang and Hewellen (1984) attempted evaluating as the how such managers would perform based on their stock selection abilities using the parametric statistical procedure. Their study involved and analysed or evaluated 67 managers of the funds and they concluded that managers’ capability and expertise to select the best stock options as well as the timing ability did not show evidence of existence in the selected sample and it was also explained through the study that the mutual fund managers did not succeed to produce any passive strategy, even collectively. Furthermore, Rehman and Lee (1990) carried out analysis on the performance of mutual fund managers using simple regression method to evaluate selection capability and managers’ abilities concerning timings. Their study showed some evidence of the presence of macro and micro forecasting skills of such managers looking after mutual funds and investments. Chen Lee, Rahman and Chan (1992) analysed the movement of 93 funds for a period of 87 months and found that only 5 possess positive market timing ability while in opposite of that 23 displayed negative timing. While Chen and Jang (1994) observed 15 US based mutual funds and found little evidence in support of manager ability to choose the right stocks.
The literature available on the performance measurement of the fund managers based on their ability to select good stocks or funds, mostly comprised of studies that are old. Due to this, it can be observed that there is a lack of contemporary literature available. However, the recent studies that are available can also be seen to base their arguments mostly on the old researches that have been carried out in the 1960s and above. The study of Das and Rao (2015) have researched the market timing and the fund managers’ ability of selecting stock portfolio and revealed that, the stock selectivity of the funds was statistically significant while the timing was not. In support of this study, the research of Mohanit and Priyan (2018) also put forward the findings that those who are in charge of mutual funds exhibit good stock selection ability. However, in contrast to these studies, the study of Oliveria et al. (2018) has argued with the help of an empirical investigation that abilities of fund managers about selection or opting the best stock does not show any sign of positivity. Therefore, it can be asserted based on the studies reviewed in the current part of research that the researcher in the literature has conflicting views on a fund manager’s expertise on opting the best stock and there is a dearth of recent research work available on the topic under investigation.
2.6 Ability of Mutual Funds Managers as per Market TimingsStudies existing in literatures on such subjects as management of market timing sand selection ability of the best stocks which are available in markets by the managers of mutual funds is significantly rich and dates back to several decades. So market timing refers to knowing that in which direction it is going, bull or bear and then portfolio will be positioned accordingly. For instance, if a manager is expecting a fall in the market so maybe beta can be reduced and instead cash percentage should be increased however in the reverse scenario beta can be increased. Treynor and Mazuy (1966) were the authors who carried out pioneering work in this domain and put forward a model that can be applied for determining the ability of managers’ for managing the best market timings. When these authors used their developed model in their study, they found that only one, a single manager, out of a hefty total of fifty-seven fund managers had significant ability of timing. Moreover, another model for gauging this timing ability of marketing a mutual fund executive or manager was given by Henriksson and Merton in 1981 which was confirmed, then was utilised in the study conducted by Henriksson (1984) who found that only three managers of mutual fund from a cumulative sample of a total of 116 managers exhibited significant aptitude in market timing expertise. After this, the literature has shown that Chang and Lewellen (1984) also carried out an analysis to evaluate market timing ability of the administrators, managers or executives; they found light evidence to support the hypothesis.
Apart from this, the study carried out by Rahman (1990) was conducted to determine the market scheduling or timing ability of over 93 such funds over a time of 87 months ranging from 1977 to 1984. The study revealed that there was some of the evidence available for the superior abilities of the managers in forecasting at the individual levels. The later studies can be seen to have adopted different methods for examining the timing aptitudes of funds. The study of Bello and Janjigian (1997) adopted the model that Treynor and Mazuy presented for the analysis of American fund managers’ capabilities pertaining to market timings in their US equity market. These authors put forward the findings which were completely in opposition with regards to the conclusions obtained by applying original framework by Treynor and Mazuy that has been discussed above. Meanwhile, the study of Kao, Cheng and Chan (1998) determined the market timings’ or scheduling ability of the global managers of the mutual funds and found by using a sample of 97 US international funds that, there is light evidence to show weaker ability. Rao and Venkateswarulu (1998) studied TM & HM model to analyse the market timing of UTI manger and found this quality missing in managers. Gupta (2002) also used these model to test market timing ability of 73 mutual funds of India during the period of 5 years from 1994 to 1999 and result indicated that manager are found weak with respect to possessing this ability.
However, majority of studies discussed above utilised data of return from funds which was based on period of amonth, along withthe market proxy in examination, which is a method debated among the authors. The study of Berk and Van Binsbergen (2015) has put forward the argument that using data generated on monthly basis for the examination of the market timing abilities of the fund managers may not be appropriate because the decisions in regard to the market exposures of the funds are carried more often than on monthly basis. To strengthen this idea, the study of Chourmouziadis and Chatzoglou(2016) proposed that data generated on daily basis is more relevant and appropriate to determine the depth in capabilities of fund managers for timings of market and for the case regarding mutual funds and portfolio, the daily tests have revealed more significant results than those in the monthly tests.
In this regard, a recent study carried out by Bu (2019) incorporated frameworks by Treynor and Mazuy (1966) and, Henriksson and Merton (1981) to examine managers’ and executives’ market timings abilities on a daily basis and concluded that theses abilities being based on daily data, depend solely on luck. Furthermore, a study by Sherman, O’Sullivan and Gaoin year 2017also followed frameworks of Treynor and Mazuy (1966) and Henriksson and Merton (1981) designed for gauging the market scheduling timing skill of fund managers in China from years 2003 to 2014. Their study revealed that only one in every 417 funds give forth statistically significant results of this timing ability. The conclusions by most of the studies available in literature have shown that funds do not time the market. However, it has been identified that the results of the studies vary with respect to different regions which may indicate that the results of study fluctuate in developing and developed economies. Therefore, it can be asserted that the literature does not have any conclusive evidence on the emphasized factor of timing ability of executives managing any mutual fund, which can be generalized.
2.7 Research HypothesisH1o: Market timing ability do not possess in mutual fund managers in Pakistan.
H1a: Market timing ability possess in mutual fund managers in Pakistan.
H2o: Stock selection ability do not possess in mutual fund managers in Pakistan.
H2a: stock selection ability possess in mutual fund managers in Pakistan.
7. 3. METHODOLOGY AND DATA 3.1 IntroductionThe aim of this research is examine the stock selection and market timing ability of Pakistani mutual fund managers. This chapter will explain the methodology followed to assess these abilities of Pakistani mutual fund managers. In particular, we will use the stock selection and market timing approaches to assess the Pakistani mutual fund manager’s abilities. We adopt two models in our research, first is Treynor (1965) and second is Jensen (1966) to evaluate the Pakistani mutual fund manager’s abilities.
The remaining of this chapter is arranged as follows, section 3.2 will discourse the two major work plan, stock selection and market timing and section 3.3 will review the data source, 3.4 existing the population of the work study, 3.5 finally section includes sample size of the study.
3.2 Theoretical FrameworkThe literature has various theoretical models available based on which the researchers have attempted to assess how well do the managers of mutual funds should or have performed. Some of these models have been mentioned above in the literature along with the results these models have revealed. However, for the current research, the models of Treynor and Muzay (1966) and Jensen (1968) have been selected. The current section has provided a brief description of these models.
3.2.1 Treynor and Muzay, 1966Model or framework by Treynor and Muzay can be defined as a more emphasized and inclusive measure of the performance. It can be provided by the annual return received on the fund and then subtracting the yield of an investment that is risk free, which is then subtracted from the total of return on the two arbitrated portfolios into the predicted sensitivity of funds to the risk factors in the same time period (Paramita, 2015). The Treynor and Muzay measure provides a way of measuring the excess returns gained by the fund manager that cannot be understood by the current positions of his risk. The magnitude of the currently discussed model is dependent on the two different factors which are, the return obtained on the funds and the variability of the sensitivities of risk (Treynor and Mazuy, 1966). Hence, this determination of performance can be used to denote the aspect of the average return of the fund which could not be elaborated by the utilisation of common factorial risk exposure. In other words, the Treynor and Muzay model can be expressed as a function of the extent to which the predictions of the managers regarding the factors in the market are good. The study of Murphy (2015) has indicated that the reliability as well as the accuracy of this model is dependent on the quality of the proxy of market and on the assumption that the timing abilities of the managers of fund are stable. Following is the formula of this model:
TM p,t = [ Et (Rp,t) – Rf ] – { bp [ Et (Rm,t) – Rf ] + dp [Et (Rm,t) – Rf ]2 }
Where:
Et Rp,t = Annual mean return obtained on fund into consideration over time
Et Rm,t = Annual mean return on market portfolio over time
Rf = Risk-free rate proxy
bp = Slope of the portfolio function of return
dp = Parameter based on the convexity of the portfolio return function
3.2.2 Jensen, 1968The model can also be described as an outright performance measure and it can be given by, the annual rate of return of fund, eliminating the risk-free return from an investment, detracting the benchmark rate of return into the fund’s beta value, which is an indicator of risk, in the same period. The Jenson’s model can be interpreted as the excess return received by moving away from the benchmark (Marti and Ballester, 2019). The magnitude of the currently discussed model is composed of the two major variables that are the beta and the benchmark rate of return. This model can be used to denote the aspect of the average return of fund which could not be revealed by the introduction to systematic risk due to variations in the market. Following is the formula of this model:
at = [Et (Rp,t) – Rf] - bp [Et (Rm,t) – Rf]
Et Rp,t = Annual mean return on fund into consideration over time
Et Rm,t = Annual mean return on market portfolio over time
Rf = Risk free rate proxy
bp = Estimated sensitivity by fund return to benchmark variations.
3.3 Data SourcesThe data of fund return is collected from fund manager reports of the respective funds which are available in their websites. The data of market return is collected from Pakistan stock exchange website. However, risk free rate of return which is government one year T bills rate is collected from the state bank of Pakistan website. The time span for the study is from 2008 to 2018 and the frequency of the data is annually.
3.4 PopulationCurrently there are 371 funds operated in Pakistan which are divided into nine different categories. Money market fund, Capital protected fund, Fund of Fund, Income funds, balanced fund, Asset allocation fund, Index tracker fund, Equity fund and Shariah complaint funds.
3.5 SampleOut of these nine categories we select equity funds and shariah complaint equity funds by using purposive sampling techniques .The sample compromise of 38 mutual funds managers, 21 conventional equity funds managers and 17 Islamic equity funds managers. We select these two categories because of two reasons, first we want to evaluate the manager’s performance between two categories and second these two categories mainly compromise of stocks beside other categories which allocated their pool money in fixed income securities and in national savings. So manager performance truly matters in equity categories that are why we select these categories.
4.1 Market Timing
Table4.1 Summary statistic of Islamic and conventional mutual funds
CONVENTIONAL FUNDS
Stats
Mean
Median
Maximum
Minimum
Std. Dev.
Rit
15.52
18
73
-32
21.52
RM
17.64
16
52
-19
21.22
Rft
9
9
13
6
2.42
RM - Rft
8.60
9
43
-30
20.95
Rit - Rft
6.48
8
64
-43
21.60
ISLAMIC FUNDS
Rit
12.04
16.5
56
-32
21.6
RM
17.64
16
52
-19
21.74
Rft
8.72
9
13
6
2.38
RM - Rft
5.41
9
43
-30
21.65
Rit - Rft
3.32
7.50
47
-43
21.83
Note : Fund Return Rit is measured in Percentage, KSE 100 Index is used as proxy of market return Rm, Rft is a Risk free rate of return, RM – Rft is a risk premium and Rit – Rft is excess portfolio return.
We perform the descriptive statistic in the above table. The annual mean returns of conventional funds are 15.52 with standard deviation of 21.52 percent. The annual market return is 17.6 percent with standard deviation of 21.22 percent. The mean fund return is less than the market return which indicates that on average conventional fund do not outperform the market. The Maximum fund return over the sample period is 73 percent and minimum is -32 percent which indicates this segment is highly volatile. The average Risk premium over the sample period in conventional funds is 8.60 percent and the average excess fund return is 6.48 percent annually.
On the other side Islamic mutual funds have mean annual return of 12.04 percent with standard deviation of 21.6 percent. The Islamic funds also underperform from market with a difference of 5.6 percent. The maximum return for the period is 56 percent while minimum is -32 percent. The average risk premium for Islamic funds is 5.41 percent that is less than conventional funds which also shows that Islamic funds are quite less risky as compared to its counterpart.
4.2 Manager PerformanceTable4.2 Empirical Result of Single Factor Capm Model
Fund Portfolio Jensen (α) β Adj. R2 F satistic
Conventional Funds -1.30* 0.89*** 0.76 646***
(0.78 )(-1.67) (0.03) (28.06)
Islamic Funds -1.69* 0.86*** 0.73 344***
(0.98)(-1.71) (0.04)(17.68)
All Funds -1.43*** 0.88*** 0.75 995***
(0.59)(-2.39) (0.02)(32.64)
Note: we apply the CAPM single factor regression model with random effect on unbalanced panel data. Hausman Test was applied for selection appropriate model. The fund manager performance in all three portfolios is evaluated by eq. 2 Rit – Rft = α + β(RM – Rft) + μt . The α represents the Jensen alpha, whereas β is systematic risk. The number reported in first parentheses is standard error and in second parentheses is t statistic. Adj. R- square measures the fitness of model. *** , ** , * indicate 1 . 5 and 10 percent significant level.
Table 2 represents the empirical results of CAPM single factor model. The Jensen alpha is an indicator of manger performance. In all three portfolios Jensen alpha α is negative and significant .This indicates that manager performance is not superior in all three portfolios in over sample period. This also indicates that both Conventional and Islamic fund managers do not outperform the market (KSE 100 index). The systematic risk beta of all three portfolios is less than 1 which indicates that funds are quite less volatile as compared to market. The adjusted R square in all three portfolios shows that the models are good fitted and F statistic also significant at 5 percent probability level.
Table4.3 Stock Selection Skills and Market Timing Ability
Fund Portfolio
α
β
γ
Adj. R2
F statistic
Conventional Funds
0.17
0.93***
-0.003***
0.77
336***
(0.85)(0.19)
(0.02)(35.7)
(0.001)(-3.15)
Islamic Funds
1.79*
0.92***
-0.007***
0.76
203***
(1.03)(1.72)
(0.04)(20.8)
(0.001)(-6.84)
All Funds
0.76
0.93***
-0.005***
0.77
539***
(0.66)(1.15)
(0.02)(39.8)
(0.0008)(-5.74)
Note: To evaluate the stock selection and market timing ability of fund managers we applied the Tranoy and mazuy model as
Rit- Rft = αi + β(Rmt - Rft )+ γ(Rmt - Rft )2 + εit . Alpha α represents the stock selection ability and γ donates the parameter measuring the market timing performance. The number reported in first parentheses is standard error and in second parentheses is t statistic. Adj. R- square measures the fitness of model. *** , ** , * indicate 1 . 5 and 10 percent significant level.
Table 3 represents the empirical results of Tranoy and mazuy model. Alpha α is the indicator of stock selection ability of fund managers. In overall sample we found no stock selection ability however the alpha α is positive but it is not significant. Similarly the stock selection ability of fund managers is also absence in case of conventional funds. However in case of Islamic funds the alpha α is positive and significant at 10 percent level. This indicates the presence of stock selection ability in Islamic fund to some extent. The overall result indicates lack of stock selection ability of fund managers in Pakistan. On the other hand the γ coefficient of all three portfolios is negative and significant at 5 percent level respectively. This implies that all portfolios have negative market timing ability in over sample period. The beta of all portfolios are less than 1 which show funds returns are quite less volatile then market(KSE 100 index). The R square value indicates that all over models are well fitted. Our results are similar with the existing literature on developed markets that founds lack of stock selection and market timing ability of mutual fund managers (chen et al 1992, chen & Lewellen 1984, Thiana 2013, ). However our results are contrary to the finding of lio et al 2017, who found positive market timing ability of mutual fund managers in china during his sample period.
5. CONCLUSION AND FUTURE SUGGESTIONS
Investing through mutual funds in equities is becoming increasingly popular among Pakistani investors. Because the mutual funds industry has shown remarkable growth in Pakistan over the last some years. So it’s extremely important to evaluate the performance of Pakistani Mutual fund especially conventional and Islamic fund, thus my research problem is “How does a Pakistani conventional and Islamic equity fund perform in the view of timing and selection ability”. In this study, our main objective was to explore the detailed analysis of stock selection ability and market timing ability of Pakistani mutual fund managers during 2010 to 2019. This study presents a detailed analysis of stock selection ability and market timing ability evaluation for a sample of conventional mutual funds and Islamic mutual funds by employing Treynor and Muzay, 1966 and Jensen, 1968 models.
The annual mean returns of conventional funds are less than with standard deviation. The annual market return is also less than the standard deviation. The mean fund return is less than the market return which indicates that on average conventional fund do not outperform the market. The Maximum fund return over the sample period is 73 percent and minimum is -32 percent which indicates this segment is highly volatile. On the other side Islamic mutual funds have mean annual return is less than with standard . The Islamic funds also underperform from market with a difference of 5.6 percent . The average risk premium for Islamic funds is 5.41 percent that is less than conventional funds which also shows that Islamic funds are quite less risky as compared to its counterpart. Jensen alpha α is also negative and significant .This indicates that manager performance is not superior in all three portfolios in over sample period. This also indicate that both Conventional and Islamic fund managers do not outperform the market (KSE 100 index). So our first null hypothesis is accepted that market timing ability do not possess in mutual fund managers in Pakistan.
In the Tranoy and mazuy model the Alpha α is the indicator of stock selection ability of fund managers. In overall sample we found no stock selection ability however the alpha α is positive but it is not significant. Similarly the stock selection ability of fund managers is also absence in case of conventional funds. However in case of Islamic funds the alpha α is positive and significant at 10 percent level. This indicates the presence of stock selection ability in Islamic fund to some extent. The overall result indicates lack of stock selection ability of fund managers in Pakistan. So our other null hypothesis accepted that stock selection ability do not possess in mutual fund managers in Pakistan. Our results are similar with the existing literature on developed markets that founds lack of stock selection and market timing absility of mutual fund managers (chen et al 1992, chen & Lewellen 1984, Thiana 2013, ). However our results are contrary to the finding of lio et al 2017, who found positive market timing ability of mutual fund managers in china during his sample period.
5.1 Future SuggestionsIn this study, I applied only two models to examine both timing and selection ability of conventional and Islamic Pakistani equity funds, and for future possibility study, I hope to employ several methods and approaches on this topic such as the TMFF3 model and HM-FF3 model, which will makes my study more comprehensive and accurate than this research. The frequency of the data is annually in my study and for future possibility study; I hope to employ the weekly or daily data on this topic for more accurate and comprehensive results. In this study, I use only two funds conventional and Islamic funds, for the future possibility study, I use all type of funds.
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