ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/

MARKET TIMING ABILITIES OF EQUITY FUND MANAGERS

DR. R. SIVARAMA PRASAD*; B. SRINIVAS**
*Director and Research, Department of International Business, Acharya Nagarjuna Universtiy, Guntur 522510, Andhra Pradesh, India. **Research Scholar, Acharya Nagarjuna University, Guntur 522510, Andhra Pradesh, India.

ABSTRACT The present study aims at indentifiying timing abilities of fund managers of 17 equity schemes in India over the period of 1st April 2000 to 31st March 2010 fund managers and Treynor and Mazuy Model (1966) and Henriksson and Merton (1981). The study indicates fund managers are successful in timing the market by repining returns in excess of the market.

INTRODUCTION The financial market plays a crucial role in the economic development of a country by facilitating the allocation of scarce resources. By transferring resources from the saver to the borrowers.It directs resources from the idle to the productive sectors, thus accelerating investment activities in the economy. The changes in Indian capital markets taken place during the year 1990 reforms in terms of liberalizing industry trade taxation and foreign investment and reforms in the financial sector improving the functioning of banks and financial institutions and strengthening the money and capital markets. The changed environment the mutual funds are playing a vital role in financial intermediation development of capital market and the growth of the corporate sector. Mutual fund plays a dynamic role in mobilizing savings by issuing units and channeling the funds in the capital market into productive investment. Mutual fund works on maximum return and diversification of risk to do all these activities fund manager needs to attain these goals fund managers possess good selectivity skills and also fund manager possess good market timing skills . www.zenithresearch.org.in The performance of equity fund manager can be measured in terms of stock selection ability and market timing abilities. Stock selection refers to micro forescasting ability to identify under or overvalued securities. It is possible through applying stock selection technique to achieve superior returns by timing market correctly. Market timing refers to the timely rebalancing of the portfolio switching of funds among the various asset classes and taking advantage of market . LITERATURE REVIEW Performance evaluation of mutual funds is a paramount importance to both investors as well as fund managers. There is several performance measures have been suggested to measure the performance of managed portfolios. A good number of studies have used risk-adjusted measures

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Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/

of performance of mutual funds .The available literature on the performance of mutual funds basically deals with two important issues. i.e. selectivity and market timing. Jensen (1968) developed an absolute measure of performance to evaluate the investment managers predictive ability-that is his ability to earn higher returns through successful prediction of security prices. In this model excess fund returns are regressed upon the excess market returns and the intercept of this regression known as alpha shows the differential return earned by the scheme because of investment managers predictive abilities. By evaluati ng the performance of 115 open-end mutual funds over the period 1945-1964 Jensen found that on average investment managers were not able to predict security prices efficiently to outperform the market Fama (1972) suggested that overall performance of a managed portfolio could be broken down into several components. She argued that while observed return of a fund could be due to the ability of fund managers to pick up best securities at a given level of risk (selectivity) it could also arise due to prediction of general market price movements i.e their timing ability. Selectivity can be further decomposed into net selectivity and diversification Henriksson(1984) examined the performance of the investment managers by using both the parametric and non-parametric tests in terms of Henriksson and Merton(1981) formulation. The study evaluated the market timing ability of 115 open-ended US mutual funds and found that only three funds had significantly positive estimates of Market timing in terms of parametric tests and all three had negative overall estimates of performance in terms of non-parametric tests. Jagannathan and Korajczyk(1986) showed the possibility of creating an artificial market timing by investing in option-like securities. Using Henriksson and Merton technique they concluded that if the fund being analyzed tend to hold assets that are less option like(High-quality) than the average asset in the market proxy, then one would expect to see negative timing and positive selectivity measures Conversely fund holding assets that are more option-like than the assets in the market proxy would show positive timing and negative selectivity. Grinblatt and Titman(1989) examined whether there were fund managers who had superior stock selection abilities to generate abnormal returns. Applying Jensens measure they concluded that superior performance might exist among growth funds and also among funds with the smallest net asset values. Ippolito(1989) evaluated performance of 143 mutual funds over a 20 years period from 19651984 in terms of selectivity parameter using CAPM He reconsidered the studies undertaken by Jensen (1968) and departed from traditional approach of evaluating performance of individual fund managers. Instead the stress was on overall efficiency of the mutual fund industry. The study concluded that the alphas were significantly greater than zeros but not higher enough to offset the load charges on an average for the industry. Brinson(1995) articulated that fund managers should develop model delineating responsibility and their contributions to the fund performance would be measured by investment policy market timing and security selection. The study also developed a framework to decompose portfolio www.zenithresearch.org.in

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Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/

returns that had since also developed a framework to decompose portfolio returns that had since been successfully used practice by investment managers to measures portfolio performance. Thiripalraju ad Patil(1997) evaluated 21 tax saving schemes of Indian mutual fund managers in terms of famas investment performance measures. Their study concluded that Indian fund managers lack both the micro and Macro forecasting abilities. Barua and Varma(1991) evaluated the performance of master share(1987-1991) using CAPM approach. The study had used ET Index as a proxy for market behavior. The risk-adjusted performance is measured by Using Sharpe Jensen and Treynor measures. The study concludes that the fund did not do well when compared to CML. Sethu (1999) conducted a study to establish whether a) the fund portfolios are adequately diversified 2) do they give excess returns after adjusting for systematic risk; and 3) do the portfolios show market timing abilities. On examining 18 open-ended growth funds for the period March 1985-july1999 the percentage of beta risk (44.33to73.88) and percentage of diversifiable risk (55.57 to 26.62) indicated poor diversification. The excess return earned by the funds is statistically insignificant. Majority of the funds showed negative returns. However some of the funds showed positive returns. No funds exhibited any ability to time the market. Hence these findings negate the claim of the mutual fund managers that they can sight and exploit better market opportunities than a nave investor. Rao and Venkanteswarlu (2000) have studied the market timing abilities of the fund managers with respect to Unit trust of India. He has used the Treynor-Mauzy method and HenrissonMerton technique, to study the market timing abilities of mutual fund managers. Of the nine schemes he analyzed under the Treynor-Mauzy method, only one exhibited an attempt at forecasting the market and changing securities accordingly. As per the Henriksson-Merton technique there is no evidence of macro forecasting abilities present in UTI. OBJECTIVE OF THE STUDY The Study aims at finding market timing abilities of indian fund managers during the period of 1st April 2000- 31st March2010. RESEARCH METHODOLOGY DATA AND THEIR SOURCE Research Methodology adopted in the present study to identifiy the fund managers market timing abilities during the period of 1st April 2000 to 31st March 2010 SECONDARY DATA Daily Net asset value of 17 sample equity Mutual Fund have been drawn from the books of accounts determined on the basis of data contained in such books of respective asset management companies. The information of NAV was mostly complied from secondary sources like amfiinndia.com the websites of the respective mutual funds, mutualfundindia.com. The www.zenithresearch.org.in

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Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/

respective source are cross-checked with other sources that to ensure validity of the data but it is found to be same during the period between 1st april2000 to 31st march2010. THE RISK FREE RETURN In this study 91-Days Treasury-Bills (T-Bills) have been used a surrogate for risk free rate of return as has been done most of the researchers would wide. The T-Bills information had been obtained from RBI Report on currency and finance. BENCHMARK PORTFOLIO The Bombay Stock Exchange Sensex also referred to as BSE-30 of well established and financially sound companies listed on BSE. The 30 component companies which are some of the largest are most activiely traded stock are representative of various industrial sector of Indian economy published since Jan 1 1986 the senesex is regestried as the pulse of the domestic stock market in india the base value of the sensex is taken 100 on 1st April 1979 and its base year 1978-79 PERIOD OF STUDY The sample period covered in the study is 10 years i.e 1st april2000-31st march2010. A ten years period is sufficiently long enough for carrying out study of performance evaluation measures. SELECTION OF SCHEMES The sample schemes consists of 17 number of equity schemes managed. The choice of sample schemes was guided by the fact that a reasonable amount of information was available on these schemes for the period of study. SCOPE OF THE STUDY The sutdy attempts to find market timing abilities of Indian fund managers by considering only one benchmark (BSE-Senesex) form 1st April 2000 to 31st March 2010. For this purose only equity schemes are considered. EMPIRICAL RESULTS ON MARKET TIMING EVIDENCE OF MARKET TIMING The Present Study examines the market timing abilities of fund managers by using Treynormazuy and Henriksson Mertorn. The results of overall market timing abilities of fund managers are shown superior market timing abilities of fund managers www.zenithresearch.org.in

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Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/

TABLE 1: RESULTS OF TREYNOR- MAZUY MODELS( SENSEX) S. No. 1 Scheme Name Birla Sunlife Buy India Fund Birla Sunlife MNC Growth Fund DSP BlackRock Top 100 Equity Fund DSP BlackRock Equity Fund Franklin India Bluechip Growth Templeton India Growth Fund HDFC Index Fund-Nifty Plan Beta 0.5707971 S.E Beta 0.0320736 t- Beta 17.8347106 Gamma 0.052964 S.E.Gamma 0.197427556 t-Gamma 12.00895122* R2 0.5608756

0.6031173

0.1100908

14.9276153

0.2765212

0.1653191

9.8490112*

0.4289237

0.79176886

0.04771686

46.2465983

0.34295229

0.15739243

19.5017991*

0.79104629

0.8681308

0.0583923

24.770415

0.3216336

0.260093

17.0142384*

0.6677686

0882706

0.0288709

32.7729983

1.5226615

0.6929975

2.28514183*

0.86467467

1.004064143

0.017611714

73.12058571

1.625673429

0.120155571

57.28972814*

0.92346081

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0.9203216

0.0235164

46.163389

0.5674834

0.2081471

26.1459698*

0.8898629

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Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/

9 10

11

12

13

HDFC Index FundSensex Plan LIC Equity Fund LIC Growth Fund Morgan Stanely Growth Fund Principal Growth Fund Reliance Equity Fund

0.983096857

0.011421

172.4356029

1.477717571

0.091381143

140.6141757*

0.950869286

0.9427334 0.777572

0.0305663 0.068791

33.843108 11.10003167

0.9322217 0.7192705

0.1467566 0.87429875

21.2276061* 10.13874575*

0.7964656 0.57636475

0.86095275

0.088029875

36.57112625

0.772209875

0.05094125

29.92490416*

0.762919125

-0.19394133

0.053027767

23.6740122

3.661103814

0.44841233

13.11737722*

0.81416733

0.7655116

0.0436457

20.7018654

0.90937416

0.7489574

10.0483693*

0.6899742

14

15

16

17

0.4055312 Reliance Vision Fund SBI 0.9106406 Magnum Contra FundGrowth Tata Pure 1.0313109 Equity Fund Principal 0.9966972 Index Fund

0.0480366

6.9934042

0.0428551

0.0608509

-0.8603415

0.366658 www.zenithresearch.org.in

0.0360572

35.219902

1.7230006

0.6969458

23.6926896*

0.8552338

0.2023181

14.6285368

0.1865

0.1201282

1.8937193

0.8345112

0.02187022

69.234529

0.9281222

0.1479401

36.273336*

0.8987793

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*significant at 5% level Table 1 presents the results for th Treynor Mazuy(Sensex) formulation. It is observed that mutual fund managers of 16 chemesMorgan Stanely Growth Fund, Principal Growth Fund, LIC Equity Fund, SBI Magnum Contra Fund-Growth, Templeton India Growth Fund, Birla Sunlife Buy India Fund, HDFC Index Fund-Sensex, Principal Index Fund, , Birla Sunlife MNC Growth, DSP BlackRock Top 100 Equity Fund, DSP BlackRock Equity Fund, Franklin India Bluechip Growth, LIC Growth Fund, HDFC Index Fund-Nifty Plan, HDFC Index Fund-Sensex, Reliance Equity Fund,seem to be successful market timer. This is evident from the observed t-values for their gamma coefficient which are found to be significant positive at five percent level .While Reliance Vision Fund t-value is insignificant at 5 percent level but positive of gamma and Tata Pure Equity Fund,t-value is insignificant at 5% level and gamma value is positive for these schemes fund manager are not successful market timer TABLE:2 RESULTS OF HENRIKSSON AND MERTON(MARKET INDEX-BSE-SENSEX) S.No. Scheme Name 1 Birla Sunlife Buy India Fund 2 Birla Sunlife MNC Growth Fund 3 DSP BlackRock Top 100 Equity Fund 4 DSP BlackRock Equity Fund 5 Franklin India Bluechip Growth Beta 1.0325085 S.E Beta 0.1628233 t- Beta 7.9715212 Gamma 0.8010694 S.E.Gamma 0.1691449 t-Gamma 4.0904711* R2 0.334548

0.9871487

0.2317234

0.8495675

2.0602319

0.2277192

4.8316036*

0.2817507

1.4709863

0.3532487

7.8745895

0.1808479

0.3317911

4.1384532*

0.3552155

1.5025465

0.1172698

13.7680565

1.1258223

0.1327177

6.0385284*

0.61150491

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1.07827543

0.09252786

23.9833376

0.66856257

0.10100729

6.58366514*

0.65441586

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 1, January 2012, ISSN 2249 8826 Online available at http://zenithresearch.org.in/

9 10 11

12 13 14

Templeton India Growth Fund HDFC Index Fund-Nifty Plan HDFC Index Fund-Sensex Plan LIC Equity Fund LIC Growth Fund Morgan Stanely Growth Fund Principal Growth Fund Reliance Equity Fund

0.98053083

0.073442

15.5369451

0.18026917

0.08892883

2.22418583*

0.864613

1.749823714

0.129012143

16.98523429

1.1513168429

0.134740429

10.82563866*

0.561901571

1.7418015

0.1322305

23.12744313

1.4641165

0.13792733

8.896907833*

0.564172833

1.8271593 0.913928728 1.610781

0.16317959 0.045947444 0.187029

14.2305609 24.86569056 12.35320566

1.5399951 0.689376884 1.4871125

0.1685793 0.514050576 0.1894991125

8.3535829* 11.95576711* 7.4945425*

0.8161619 0.7233 0.326786375

1.531068667 1.1179407 0.35965699

0.144461333 0.1213122 0.0218154

14.30362978 10.6208804 15.5336344

1.149114337 0.593039 0.088848

0.151428 0.1365033 0.3386976

7.217668778* 3.5212649* -0.9807857

0.588815889 0.6101381 0.3656848 www.zenithresearch.org.in

15

16 17

Reliance Vision Fund SBI Magnum 1.371606 Contra FundGrowth Tata Pure 0.9183103 Equity Fund Principal 1.6254604 Index Fund

0.1180358

14.7146016

3.0428326

0.1290486

7.62987796*

0.7090414

0.0389638 0.1309863

29.90531 31.4401542

1.0828728 1.360731889

0.846891 0.14802728

1.3742515 8.646747849*

0.79745108 0.50695211

*significant at 5% level

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Table 2 presents the results for the Henriksson and Merton(BSE-Sensex) formulation. It is observed that mutual fund managers of 16 schemesMorgan Stanely Growth Fund, Principal Growth Fund, LIC Equity Fund, SBI Magnum Contra Fund-Growth, Templeton India Growth Fund, ,, Birla Sunlife Buy India Fund, HDFC Index Fund-Sensex, Principal Index Fund, , Birla Sunlife MNC Growth, DSP BlackRock Top 100 Equity Fund, DSP BlackRock Equity Fund, Reliance Vision Fund Reliance Equity Fund Franklin India Bluechip Growth, LIC Growth Fund, HDFC Index Fund-Nifty Plan, HDFC Index Fund-Sensex, seem to be successful market timer. This is evident from the observed t-values for their gamma coefficient which are found to be significant positive at five percent level .While Tata Pure Equity Fund,Reliance Vision fund tvalue is insignificant at 5 percent level but positive of gamma and the fund, ,t-value is insignificant at 5 percent level and positive of gamma for these schemes fund manager are not successful market timer. SUMMARY AND CONCLUSIONS This paper has empiricilly analysed the market timing abilities of of Indian fund managers in form of two models i.e One by Treynor and Mazuy and the other by Henriksso and Merton. The results indicatedMarket timing abilities of fund managers are cocerned, the study based on Treynor-mazuy and Henriksson-Merton formulation has shown that marjortiy of the fund managers are good market timier. Finally fund maagers are found as good market timer during the period of study. REFERENCES Allen, D.E., and Tan, M. L. (1998) A Test of the persistence in the performance of UK mutual Funds presented at the Asia-Pacific Finance Association Conference, held at Tokyo, July. Barua, SK., and Verma, JR., (1991), Master Share: A Bonanza for Large Investors, Vikalpa, Jan- March, pp.29-34. Cole, Joseph and IP, Y.K., (1993)Decomposition of the performance of Investment Funds and its Implications for market Efficiency, Third International conference organised by Department of Finance &Accounting, National University of Singapore. www.zenithresearch.org.in Carlson, R., (1970) Aggregate Performance of Mutual Funds, 1948-1967, Journal of Financial and Quantitative Analysis, 5(1), pp. 1-31. Fama, Eugene F., (1972) Components of Investment performance, Journal of Finance, 27. Friend, Irwin and Vickers, Douglas, (1965) Portfolio Selection and Investment Performance, The Journal of Finance, Vol.XX, No.3, Sept, pp.391-415. Gupta, O.P., and Sehgal S., (1998) Investment Performance of Mutual Funds: The Indian Experience, a paper presented at UTI-ICM Second Capital Market Conference, Dec. Gupta, Amitabh, (2000) Market Timing Abilities of Indian Mutual Fund Managers: An Empirical Study, The ICFAI Journal of Applied Finance, Vo.6, No.2, April, pp.1243- 50.

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Gupta, Amitabh, (2002) Investment Performance of Indian Mutual Funds: An Empirical Study, Finance India, Vol.XIV No.3, Sept. 2002, pp. 833-866 Grinblatt Market & Titman Sheridin, (1989) Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings, Journal of Business, Vol.62, No.3, pp. 393-416. Henriksson, Roy D., (1984) Market Timing and Mutual Fund Performance: An Empirical Investigation, Journal of Business. Henriksson, Roy D., and Merton, Robert C., (1981) On Market Timing and Investment performance II: Statistical procedures for Evaluating Forecasting Skills, Journal of Business. I. Friend, F. Brown, E. Herman and D. Vickers, A study of Mutual Funds (U.S. Securities and Exchange Commission, 1962 IP,Y.K., and HO.Y.K.,(1989) Evaluation of performance of mutual Funds in Asian Pacific Region in proceedings of the Inaugural International conference on Asian-PacificFinancial market organised by Dept. of Finance& Banking ,Nov, Singapore. Jensen, Michael C., (1968) the performance of Mutual Funds in the period 1945-1964, Journal of Finance, 23. Jack L. Treynor, (1965) How to Rate Management of Investment Funds, Harward Business Review, 43, No.1, January- February, pp.63-75. John G.Mc Donald,(1974) Objectives and Performance of Mutual Funds 1960-1967, Journal of Financial and Quantitative Analysis, June , pp. 311-33. James R.F. Guy, (1978)The performance of the British Investment Trust Industry, The 138 Vilakshan, XIMB Journal of Management Journal of Finance, Vol.XXX, No.2, May, pp. 443-55. Kaura, M.N., and Jayadev M., (1995) Performance of Growth Oriented Mutual Funds: An Evaluation, The ICFAI Journal of Applied Finance, Vol. 1, No.1, January, pp. 1-14. Muralidhar, S, (2000) MFs match FIIs financial night in stock markets The Financial Express, February 4. www.zenithresearch.org.in Richard A. Ippolito, (1993) On Studies of Mutual Fund Performance, 1962-1991, Financial Analysts Journal, January -February, pp. 42- 50. Shah, Ajay and Thomas Susan, (1994) Performance in Evaluation of Professional Portfolio Management in India, A paper prepared by CMIE, 10 April. Tripathy, Nalini Prava, (2004) An Empirical Analysis of Performance Evaluation of Mutual Funds in India-A Study on Equity Linked Schemes The ICFAI Journal of Applied Finance, July 2004

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