Performance Evaluation,Persistence In Performance,Market Timing And Selectivity Skills Of Mutual Funds

This study explores the performance analysis,persistence in performance,market timing and selectivity skills of mutual funds of Pakistan.The study uses a comprehensive sample of mutual funds of Pakistan during the period from 2011-2016.Advance sophisticated models of performance,for instance Capital Asset Pricing Model(CAPM),Fama French three factor model and Carhart four factor model have been used to assess performance of mutual funds of Pakistan.In addition,Treynor and Mazuy(1966)and Henriksson and Merton(1981)models have been employed to evaluate the market timing and selectivity skills of mutual funds.During the last two decades,emerging market mutual funds have expanded drastically.Despite these dramatic explosions in their size,there is scarce of literature exist pertaining performance evaluation,persistence in performance,market timing and selectivity skills of emerging market mutual funds,presumably due to limited availability of data.As most of the literature of mutual funds pertains to developed and advanced countries such as United States and Europe.This emerges a question that whether the findings reported in developed economies collaborate to emerging economies.The first part of the extant study aims to evaluate the performance of mutual funds of Pakistan.This study assesses the performance of mutual funds on yearly,overall and on the basis of their ten different categories through CAPM,Fama French three factor model and Carhart four factor model.According to the findings,mutual fund industry of Pakistan underperform the market on overall basis.Similarly,on the basis of yearly analysis,mutual funds provide negative alpha in almost all the years except 2015 with insignificant alpha.Moreover,the analysis reveals beta value less than one,suggesting that mutual ftmds of Pakistan have less systematic risk than the market.Fama French three factor and Carhart four factor model report that most of Pakistani mutual funds invest in small-caps stocks and value stocks.Momentum factor suggests that top(worse)performing funds continue to perform well(worse)in the following year.Findings pertaining to performance evaluation on the basis of categories of Pakistani mutual funds suggest that all the categories have negative alpha values.This implies that all the categories underperform the market.The second part of the study investigates the persistence in performance of Pakistani mutual funds.For this purpose,we ranked sample mutual funds after observing their performance of previous 12 months,then divided these fiunds into ten different portfolios.Funds with highest last one year return contains in portfolio 1 and funds with lowest return places in portfolio 10.After dividing into ten portfolios,the study watched their performance over the next 12 months and afterwards rebalance the portfolios again on the basis of their performance.Results of this study indicate evidence of persistence in performance of mutual funds of Pakistan,similar like developed markets.Winner(loser)funds of previous year persist to perform well(worse)in the subsequent year.To empirically investigate the market timing and selectivity skills of mutual funds of Pakistan is the third part of the study.Treynor and Mazuy(1966)and Henriksson and Merton(1981)have been used to examine the market timing and selectivity skills on yearly,overall and on the basis of their ten different categories of mutual funds of Pakistan.The study finds that overall Pakistani mutual funds have negative selection ability.Whereas,the study reports positive market timing ability of mutual funds of Pakistan.Analysis on the basis of ten categories of mutual funds exhibits that all the categories have inferior selection ability whereas,aggressive fixed income,capital protected,fund of funds and commodity funds have negative market timing during the sample period.