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1.

Aim and Motivation The most frequent question launched by a mutual fund investor perhaps is how the fund performs over time. This topic has been intensively researched because of its importance to consider before investing in any fund or to evaluate whether a particular fund meets investors financial goals, at least since Jensen (1968) evaluated the performance of mutual funds in the period 19451964 and he found no evidence of manager skill. Unfortunately, despite the fact that so many researchers did deep researches in this area, there is still no conclusive answer regarding the real skill of mutual fund managers. However, past studies of mutual fund performance do not explicitly recognize and model the role of luck in performance outcomes. Indeed, to a large extent, the literature on performance persistence focuses on measuring out-of-sample performance to control for luck or the use of bootstrapping method that discount the possibility that luck can also persist. In accordance with the promising and growing population of mutual funds in Asia Pacific countries, the writer would like to emphasize on this market to be analyzed further. Despite Asia accounts for approximately 60% of the worlds population, Asian investors investments only account for 13% of the mutual fund industry, compared to 52% in the America and 35% in Europe, according to PwC research. Therefore, Singapore and Australia are chosen to represent developed countries within Asia-Pacific region, while Indonesia and Thailand to represent the emerging countries.

http://www.pwc.com/gx/en/asset-management/asset-management-insights/distributing-fundsasia-growth-market.jhtml

Therefore in this paper, the writer would like to address three questions to answer. Firstly, whether the open-end mutual funds in Indonesia, Malaysia, Singapore, and Australia can outperform the benchmark. Secondly, by taking the commercial fees into consideration, whether those funds are able to bring positive return to investors. Last but not least, the writer would like to know the reason behind if the mutual funds cannot beat the market and/or not able to generate profit. However, if yes, is it due to fund managers skill or merely luck.

2. Literature Review The literature on mutual funds performance evaluation is rich both from a methodological and an empirical point of view. Numerous studies have examined the performance of mutual funds and addressed the question of whether mutual funds can outperform the market on a risk-adjusted basis. Treynor (1965) proposes to adjust the excess return of a portfolio (with respect to the risk-free return) by the portfolios , using the Capital Asset Pricing Model (CAPM) introduced by Markowitz (1952, 1959) and developed by Lintner (1965). Similarly, Jensens alpha () is dened as the dierence between the actual excess portfolio return and the (estimated) expected excess benchmark return. The benchmark could be based on either the CAPM or on the Arbitrage Pricing Theory (APT) model developed by Ross (1976). On one hand, some researchers concluded that mutual funds outperform the benchmark. Jensen (1968) evaluated the performance of mutual funds in the period 1945 to 1964 and he found no evidence of manager skill. Since then, so many researches were eager to proof the existence of mutual fund performance beating the benchmark by using different time frame, different types of mutual fund, and also different methods. Similarly, Henriksson (1984) evaluated the performance of open-end mutual funds and concluded that their empirical results do not support the hypothesis that mutual fund managers are able to follow an investment strategy that successfully times the return on the market portfolio. Since the pioneering studies by Treynor, Sharpe and Jensen, a lot of performance measures have been introduced and empirically applied for evaluating the performance of mutual funds.1 In recent years, there is a growing body of studies that apply eciency and productivity techniques2 for evaluating the performance of mutual funds. Carhart (1997) considered the persistence in equity mutual funds mean and risk-adjusted returns, but he

concluded that the results do not support the existence of skilled or informed mutual fund portfolio managers. While there is overwhelming evidence that actively-managed mutual funds, in general, do not outperform the market after accounting for risk and expenses, there is some evidence of short-term persistence and that a select few funds, in the tail of the distribution of all mutual fund returns, produce positive alphas over time. Grinblatt and Titman (1992) looked at mutual fund data and found evidence that dierences in performance between funds persist over time and that this persistence is consistent with the ability of fund managers to earn abnormal returns. Furthermore, Zeckhauser (1993) found that in the period 19741988 relative performance of no-load, growth-oriented mutual funds persisted in the near term, with the strongest evidence for a one-year evaluation horizon. Similar finding also concluded by Brown and Goetzmann (1995) who explored equity mutual fund data and found clear evidence of relative risk-adjusted performance persistence. However, they argued that the persistence was mostly due to funds that lag the S&P 500, depends upon the time period observed and is correlated across managers. Eventhough Ferson and Schadt (1996) used different method, instead of using unconditional method like the previous researchers, they advocate conditional mutual fund performance evaluation in which the relevant expectations are conditioned on public information variables and this method made the average performance of the mutual funds in their sample look better. Taking the commercial fees charged by mutual fund manager into account, Edelen (1999) show that the common nding of negative return performance at open-end mutual funds is attributable to the costs of liquiditymotivated trading: open-end equity funds provide diversied equity positions with little direct cost to investors for liquidity. Another commonly used method is bootstrapping where Meyer et. all (2012) did research on skill and luck in individual investors investment performance using a four-factor model and apply bootstrapping simulations pioneered in the mutual fund literature to distinguish skill from luck with dataset from September 2005 to April 2010. They found that 89% of individual investors exhibit negative skill ( 0) when measured on a gross basis and 91% when considering returns net of costs and expenses.

3. Methodology 3.1. Mutual Fund Performance 3.1.1 Jensens Alpha A traditional approach of measuring performance is to regress the excess return of a portfolio on the market factor, known as Jensens Alpha. It is a risk-adjusted measure of portfolio performance, which based on the theory of the pricing of capital assets by Sharpe (1964), that estimates how much a manager's forecasting ability contributes to the fund's returns. This model is based on the assumption that (1) all investors are averse to risk, and are single period expected utility of terminal wealth maximizers, (2) all investors have identical decision horizons and homogeneous expectations regarding investment opportunities, (3) all investors are able to choose among portfolios solely on the basis of expected returns and variance of returns, (4) all transactions costs and taxes are zero, and (5) all assets are infinitely divisible. Assuming that the market beta is constant, the slope coefficient is the market beta and the intercept, ..., is the unconditional alpha coefficient, which measures the average performance: ( ) 3.1.2 Carhart The Carhart benchmark is the extension of the Fama and French (1993) factor model and is effectively a four-factor Jensen measure. This model assumes that betas with respect to the returns of four zero-investment factor-mimicking portfolios: 1. High book-to-market minus low book-to-market (HML) 2. Small size minus big size (SMB) 3. High prior-year return less low prior-year return (PR1YR) 4. Month t excess return on a value-weighted aggregate market proxy portfolio (RMRF) are appropriate measures for multidimensional sustematic risk. According to this model, in the absence of stock-selection or timing abilities, the expected return for a fund is the sum of the risk-free return and the products of the betas with the factor risk-premia, which are simply the expected returns of each of these zero-investment portfolios. Alpha j, which is the Carhart measure for fund j, is calculated with the regression: [ ( ) ]

equals the excess net return of fund j during month t (the fund net return minus Tbills)

3.2 Bootstrapping A bootstrap approach is necessary because the cross section of mutual fund alphas has a complex nonnormal distribution due to heterogeneous risk-taking by funds as well as nonnormalities in individual fund alpha distributions. The simulation consists of five steps: (i) Estimating an and its t-statistic for each portfolio and calculating the value of the crosssectional t() distribution at each percentile, (ii) subtracting the estimated actual of a portfolio from its weekly returns to generate a return series with a true of zero, (iii) randomly drawing weeks to generate new return series per simulation run, (iv) estimating a new simulated and t() per portfolio in each simulation run, (v) computing the t() value at each percentile as an average of the percentile values from all simulation runs.

Framework: Estimate Jensens alpha in a simple OLS regression of funds returns on an intercept and explanatory variables (e.g. Fama-French model) and then test for the significance of alpha. Then proceed with a bootstrap analysis or a study of the techniques used by funds with positive alpha.

Data Description In order to analyze the performance of mutual funds, data regarding the last prices are

gathered. Our dataset was provided by Bloomberg and includes the population of mutual funds for which a full set of returns were available from inception through February 2013. Therefore, the writer gathered the data from 1990 to February 2013. The survivorship-bias

free dataset, which includes all share classes and all fund objectives, contains 41,248 funds. However, some limitations are given to narrow down the research. First limitation is regarding the country of availability. As mentioned previously, this paper would like to emphasize the mutual fund performance in Asia Pacific countries, thus, the dataset is narrowed down based on the four mentioned countries. Second limitation is taking into account the fund style, based on Morningstar classification.

Definition of each style https://www.wellsfargo.com/investing/mutual_funds/morningstar_desc

Large value
o

Large-value funds focus on big companies that are less expensive or growing more slowly than other large-cap stocks. These funds often feature investments in energy, financial, or manufacturing sectors

Large blend
o

Large-blend funds have portfolios that are fairly representative of the overall stock market in both size, growth rates, and price. They tend to invest across the spectrum of U.S. industries and owing to their broad exposure, the funds returns are often similar to those of the S&P 500 Index

Large growth

Large-growth funds invest in big companies that are projected to grow faster than other large-cap stocks. Most of these funds focus on companies in rapidly expanding industries

Medium value
o

Some mid-cap value funds focus on medium-size companies while others land here because they own a mix of small-, mid-, and large-cap stocks. All look for stocks that are less expensive or growing more slowly than the market. Many of their holdings come from financial, energy, and manufacturing sectors

Medium blend
o

The typical mid-cap blend fund invests in stocks of various sizes and mixed characteristics, giving it a middle-of-the-road profile. Most shy away from high-priced growth stocks, but arent so price-conscious that they land in value territory

Medium growth
o

Some mid-cap growth funds invest in stocks of all sizes, thus leading to a midcap profile, but others focus on midsize companies. Mid-cap growth funds target firms that are projected to grow faster than other mid-cap stocks, therefore commanding relatively higher prices. Many of these stocks are found in the volatile technology, health-care, and services sectors

Small value
o

Small-value funds invest in small-caps with valuations and growth rates below other small-cap peers. They tend to invest in manufacturing, financial, and energy sectors

Small blend
o

Small-blend funds favor firms at the smaller end of the market-capitalization range, and are flexible in the types of small caps they buy. Some aim to own an array of value and growth stocks while others employ a discipline that leads to holdings with valuations and growth rates close to the small-cap averages

Small growth
o

Small-growth funds focus on faster-growing companies whose shares are at the lower end of the market-capitalization range. These funds tend to favor companies in up-and-coming industries or young firms in their early growth stages. As a result, the category tends to move in sync with the market for

initial public offerings. Many of these funds invest in the technology, healthcare, and services sectors. Because these businesses are fast-growing and often richly valued, their stocks tend to be volatile

Equity MF

Open-end MF

Morningstar Style

1 2 3 4

Singapore Australia Indonesia Thailand

Structure of the Paper

The proposed structure of this paper is as follow: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Methodology Chapter 4: Data Description 4.1. Description of Variables Chapter 5: Empirical results 5.1 Answer question 1 5.2 Answer question 2 5.3 Answer question 3 Chapter 6: Conclusions, limitations, and recommendations for further researches