Evaluating mutual fund performance in an emerging Asian economy: The Malaysian experience

Abstract: This paper examines the performance of 311 mutual funds from January 1990 to December 2005 in Malaysia by using composite portfolio performance measures, the single market model, the Fama and French three-factor model, and the Carhart four-factor model across investment horizons. Overall, we have found evidence that mutual fund performances yield superior returns with relatively lower systematic risks. A 3-year investment appears to be the preferred investment horizon with the highest annualized returns of 9.23%. The results of the single market model, the Fama–French three-factor model, and the Carhart four-factor model have all indicated that beta, size, book-to-market value, andmomentum factors are significant factors in explaining equity fund returns with the Carhart four-factor model being the relatively better model among the three. The beta factor has demonstrated the highest coefficient and significance. The results further indicate that the average equity funds in Malaysia hold smaller market capitalization stocks and value oriented stocks, as well as buying past-winning and selling past-losing stocks.

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Mutual fund styles

Mutual funds are typically grouped by their investment objectives or the 'style' of their managers. We propose a new empirical to the determination of manager "style.' This approach is simple to apply, yet it captures nonlinear patterns of returns that result from virtually all active portfolio management styles. Our classifications are superior to common industry classifications in predicting cross-sectional future performance, as well as past performance, and they also outperform classifications based on risk measures and analogue portfolios. Interestingly, 'growth' funds typically break down into several categories that differ in composition and strategy.

 

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Management team structure and mutual fund performance

We investigate the relationship between performance and portfolio management team structure of open-end mutual funds during 1997–2004. We first analyze differences in performance and risk taking between single-manager and multiple-manager mutual funds and find that the latter underperform the single-manager funds in terms of risk-adjusted returns during the 2001–2004 bear market. This underperformance is more evident among growthoriented funds. There are no differences observed in the 1997–2000 bull market. Not all multiple-manager funds, however, are managed by pure teams. When we compare the performance of single-manager and pure-team fundswedo notfindany differences in performance. The underperformance of multiple-manager funds documented in previous studies comes from multiple-manager funds that employ many investment advisors and, therefore, their exact management structure is unknown. We also document differences in management structure reporting between Morningstar and CRSP.

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Management structure and the performance of funds of mutual funds

A rapidly growing mutual fund category is funds of funds (FOFs) which invest in other mutual funds instead of individual securities. This study reports on FOFs' characteristics and performance relative to traditional equity mutual funds and finds that FOFs compare favorably. FOFs with identified managers outperform their unidentified counterparts, and FOFs that invest in-family outperform both traditional equity funds and those FOFs investing out-of-family. Finally, replicating FOFs' holdings can be prohibitively expensive since they commonly hold funds with high minimum initial investments, closed funds and/or funds that are restricted o a particular investor type.

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