Vol 26, No 1; Article by Zabiulla; March 2014
The Indian capital market has been witnessing sweeping changes in the investment environment in the past two decades. In this changing financial landscape, a vast of array investment opportunities is available for investors to channelise their savings to enhance their wealth in the long run. Mutual fund is an ideal option for investors who do not have the time, professional knowledge, and expertise to otherwise invest in equity markets. The ability of portfolio managers to follow an active portfolio management strategy is reflected in their delivering impressive returns consistently to investors.
Measuring the performance of mutual funds is a topic of increased interest in both the academic and practitioner communities. This is attributed to the expanding horizon of the mutual fund industry and its implication for efficient market hypothesis. This study examines the portfolio strategies of fund managers in the Indian capital market. The study period spans the period April 2007 to March 2010. Basically, it attempts to answer two questions: Do Indian fund managers exhibit superior stock selection and market timing skills? Does the asset size and market capitalisation of the fund affect portfolio performance?
Selectivity and market timing strategies of fund managers were tested by using the Treynor and Mazuy (1966) model and the Henriksson and Merton (1981) model in their conditional and unconditional versions. The empirical results indicated that a majority of the fund managers failed to exhibit superior performance. They were inclined towards stock selection rather than timing. Perverse market timing strategies resulted in poor performance. Stock selection and market timing results revealed a negative relationship. The selectivity performance declined and perverse market timing ability increased on inclusion of macro-economic variables. The fund characteristics analysis showed that the large cap funds and large size funds posted better results than their midcap and mid-size counterparts. Small cap and small size funds displayed poor performance.
Fund managers were unsuccessful in adding value to their portfolio relative to the market portfolio. They were unable to time the equity market by shifting funds across various asset classes depending on broad market forecasts and estimated risk premiums. They failed to position their portfolio to take advantage of stock market trends during the economic cycle.
