Predicting the relative performance of actively managed equity mutual funds using diverse performance evaluation techniques

Akshay Damani,Nandip Vaidya

doi:10.22495/cocv19i1art6

Abstract

Mutual fund performance evaluation has seen an ever-growing interest for research amongst industry and academicians alike. In this paper an attempt has been made to compare and correlate global actively managed equity mutual funds’ performance across time intervals, to evaluate and establish how predicting future performance can be made meaningful for investors using analysis of historical data based on monthly net asset values (NAVs) (March 2009–March 2021). Of the top 500 global equity mutual funds based on market-cap (on March 31, 2021), the paper evaluated 180 actively managed funds adding up to approximately USD 5 trillion of the fund assets as of March 31, 2021. The research gap which the paper aims to fill is to bring under one umbrella, prediction analysis using performance measures, downside risk measures, style factor analysis, and market timing models. For sampled equity funds various performance ratios and style attributes were computed and compared across periods for their relative performance. Relative performance was found to be stable (at 1% significance level) across periods and hence predictable. A portfolio of funds constructed optimally using historical performance was seen to be in the top quartile ex-post performance in the subsequent period. However, it was found that the market timing abilities of fund managers were unstable across periods and could not be used for predicting performance. Based on the study findings, it would be appropriate for investors to use the relative past performance of the funds and their style attribute analysis for the future allocation of investible surplus across these funds

Highlights

Mutual funds are considered as an avenue for a systematic approach to investing in financial markets for large and small investors giving advantages of liquidity, tax sops, and diversification amongst others (Kaur, 2021)
The study indicates that while absolute return performance for an individual fund may not be predictable in the future; the relative performance of a large group of actively managed equity funds is likely to be predictable and may be used for asset allocation
It can be stated that such ranks would remain stable with a 1% significance. This applies to all the measures discussed in the research papers except for drawdown-based measures such as the Sterling ratio and the Calmar ratio

Summary

Introduction

Mutual funds are considered as an avenue for a systematic approach to investing in financial markets for large and small investors giving advantages of liquidity, tax sops, and diversification amongst others (Kaur, 2021). They act as professional intermediaries to reduce the gap between time and skill constraints (Chander, 2002) and to provide calculated risk exposure designed for better returns for diverse investors who are constrained in time, resources, and knowledge for direct participation in equity markets. According to Illmer and Senik (2013), stakeholders like investors and investment managers need timely and accurate information on the performance of their investment portfolios as it would aid asset owners to make rational and effective decisions like continuing with the fund, adding more investments, diversifying into other funds, etc., it assists the fund managers to identify the red flags of risks and helps them monitor funds more effectively

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