An integrated framework for style analysis: how is it useful to Malaysian equity trust investors?

Abstract

PurposeThe Asian financial crisis revealed the weaknesses of Malaysian fund management industry. The financial losses incurred in the crisis brought forward the issue of asymmetric information between the fund managers and investors i.e. the mismatch between the investors’ investment objectives and funds’ profiles. This paper aims to demonstrate the usefulness of the new framework in mitigating the above problem.Design/methodology/approachThis paper advocates an integrated framework of style analysis, i.e. using strong‐form of style analysis by Sharpe – a multi‐indexed benchmark for estimating the investment style of the unit trust funds, and using the weak‐form of style analysis by Amenc, Sfeir and Martellini, to measure the risk‐adjusted performance of the funds with alpha and selection return.FindingsThis study concludes that: First, the inclusion of asset classes with negative correlation coefficient enhances the performance of funds. Second, funds with relatively high degree of style (above 70 per cent) that hold large‐cap stocks together with high portion of liquid asset class (6‐35 per cent) tend to have higher alpha, translating into higher information ratio. Third, index funds have the lowest information ratio, implying that these funds are not actively managed compared with others.Research limitations/implicationsThis paper discovers a possible trend of misclassification as the degree of styles for index funds does not differ from the other fund types. Future researchers can look into the issue of misclassification of fund objectives for the existing unit trust funds.Practical implicationsThis paper highlights the importance of the equity style management in bridging the gap between emerging capital markets and developed markets. One of the conclusions highlighted in the paper is the creation of new indices for different asset classes. Asset management companies are also advised to improve their disclosure in their annual reports to mitigate the issue of asymmetric information between fund managers and investors.Originality/valueTo the author's knowledge, this empirical work using integrated framework style analysis is the first of its kind on Malaysian unit trust funds. This paper is particularly useful to regulators of emerging capital markets and asset management companies.