Suppa-Aim, Teerapan (2010)
Ph.D. thesis, University of Birmingham.
The rate of growth of investment in mutual funds has increased dramatically over the past decade. Many studies have developed models for performance evaluation and have examined whether fund managers provide value added for investors. Most of these studies, however, have focused on the developed markets and only a few examine whether the findings carry over to emerging markets as well. This thesis specifically investigates mutual funds in one of the emerging economies, Thailand, using a more extensive dataset than previous studies; it controls for investment policy and tax-purpose differences, as unique characteristics of mutual funds in Thailand. We scrutinize how fund managers perform and what strategy they use in managing their portfolios; and ask whether any fund characteristics can explain fund performance. We also explore the impact of liquidity on performance and performance measures. We find in this context that mutual fund managers, as a whole, do not have selectivity or timing ability and they do not give value added to investors. Most of the fund managers in Thailand invest heavily in small and growth stocks. Flexible fund managers are, in comparison, more active and adjust their portfolios dynamically according to economic information. There is persistence in performance in general mutual funds. This evidence is statistically and economically significant although it derives mainly from poorly performing funds which continue to perform badly. Size, age and fund family also have explanatory power in fund performance but it is specific to investment policy and the evidence is not economically significant. Net cash flows, in general, have no impact on fund performance. However, the significant amount of cash inflows can severely lower performance in mutual fund since the fund managers are unable to allocate their portfolio immediately and leave large amounts in their cash position. Liquidity also plays a major role in mutual fund performance. We find that funds which contain more illiquid assets in their portfolios perform better and this suggests that there is a liquidity premium in mutual funds. As a result, a liquidity-augmented model which includes one liquidity factor is proposed. Results from this proposed model show that our liquidity factor, as measured by stock turnover ratio, has explanatory power for fund performance, in particular in low liquidity portfolios. However, our liquidity factor is unable completely to explain the liquidity premium in mutual funds because the evidence of a liquidity premium is still present. Finally, the study reveals the policy implications of introducing the tax-benefit funds scheme in Thailand. We find that the tax-benefit funds perform significantly better than general funds and this is also true even when controlled for other fund characteristics. The tax-benefit fund managers are more passive than managers of general funds but they do not employ any different strategy from that used by managers of general funds. Tax-benefit funds are more sensitive to cash flows and contain slightly more illiquid stocks in their underlying assets. Thus, the superior performance in tax-benefit funds is not only attributable to the liquidity premium, but also to the fund managers’ superior ability, as well as to the long-term restrictions which help tax-benefit fund managers to reduce nondiscretionary trading cost in these funds.
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