Academic journal article Indian Journal of Economics and Business

Persistence in New Zealand Growth Mutual Funds Returns: An Examination of New Zealand Mutual Funds from 1997-2003

Academic journal article Indian Journal of Economics and Business

Persistence in New Zealand Growth Mutual Funds Returns: An Examination of New Zealand Mutual Funds from 1997-2003

Article excerpt

Abstract

There has been a lot of research on mutual funds performance, especially about the persistence of excess returns. Regression is the most common method used to research this fund persistence. In this study, authors use the same methodology as Dutta and Su (2008) to analyze New Zealand growth mutual funds. The sample consists of 42 New Zealand growth mutual funds over the period 1996 to 2003. Morgan Stanley Capital International world index (MSCI) was chosen as the study benchmark. The study finds that the sample of funds are likely to beat benchmark when world index get negative return and when MSCI shows positive return, most funds underperform the benchmark.

I. INTRODUCTION

There have been many debates about mutual fund performance--especially about the persistence of excess returns. The debate can be divided into two parts: on one hand, those like Carhart (1997), point out that mutual fund performance does not persist, except in the very short term; on the other hand, those like Gruber (1996) believe that performance does persist such that past performance can be a predictor of future performance.

Dutta & Su (2008) finds that the prior tests on performance of samples of mutual funds typically concentrate on common stock mutual funds. In measuring performance, studies control for the differences in objectives and assets held by the funds with control variables in the model (Gruber (1996), Carhart (1997)).

Thus, research on persistence in performance has examined samples of mutual funds in various ways. Among the studies on performance of mutual funds, most studies control for differences in objectives by including appropriate control variables in the regression analysis. The tests are made more robust by using conditional performance evaluation and including net cash flow on a sector-wide basis (Ferson and Warther (1996), Gruber (1996) and Tiwari and Vijh (2001)).

Malkiel (1995) says that since persistence of excess returns can only be tested with a sample that includes funds that have existed in both the base and the following period, the sample characteristics must necessarily be influenced by survivorship. Dutta & Su (2008) propose a comparably simpler approach--a direct annual examination of whether a fund beat the market proxy or not.

This simpler method is also used in this study. The performance and the persistence of mutual fund performance are determined by whether a fund outperforms or underperforms a chosen market benchmark on an annual basis. In this study, firms in the sample have their stated investment objective as New Zealand growth mutual funds and the study period is from 1996 to 2003.

The paper is presented as follows: previous studies of performance persistence are reviewed in section II; section III is data and methodology; Section IV presents the results of this study and Section V concludes the paper.

II. PREVIOUS STUDIES OF PERFORMANCE PERSISTENCE

Carhart (1997) determines that the performance of mutual funds does not persist in the long term. His study supports Hendricks, Patel and Zeckhauser's (1993) results of a short-term persistence in stock returns. Carhart also finds persistence in poor performance by the lowest decile of fund performers.

Agarwa] & Naik (2000) find only a maximum persistence at a quarterly horizon indicating that persistence among hedge funds is short-term in nature. They also point out that there is no evidence of persistence using yearly returns under the multi-period framework.

Casarin (2002) finds, with multi-periods persistence analysis, (i) absence of longrun excess persistence on total returns and on risk adjusted returns; (ii) evidence of a "hot-hand'(positive performance always followed by positive performance, winning following by winning) effect on risk adjusted returns on four-month intervals (short run persistence).

Otten& Barns (2000) believe that the search for a "not hands" effect provided only weak evidence of persistence in mutual fund performance, except for UK funds. …

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