ANALYZING MUTUAL FUND MANAGERS’ STOCK SELECTION VS. MARKET TIMING ABILITIES: PORTFOLIO AND SEVEN STRATEGIES DRIVEN APPROACH

Abstract

The study adopts a portfolio-driven approach to investigate the stock selection and timing (SSMT) abilities of the fund managers of Open-Ended Mutual Funds in Pakistan through Treynor and Mazuy (1966) [T&M] and Henriksson and Merton (1981) [H&M] models. Time series data collected monthly for 190 firms from 2012 to 2022 is analyzed. Seven distinct strategies including cash holding levels, logarithmic fund size, unit redemptions, management fees, front-end and back-end loads, and the number of funds managed within a family are used to create portfolios annually, which also mitigate survivor bias concerns. The findings show that fund managers perform poorly with respect to stock selection abilities; however, they better time market in all seven cases. Further the average portfolio returns are relatively higher of low cash holding, small size, less redemption, low expense ratio, less number in family and front-end load funds relative to their corresponding funds. It is recommended that during the bullish trend in the market, fund managers should keep more cash, reduce operating expenses, increase redemption, decrease number of funds in family and shall not charge any front-end fee. Besides the implications of the outcomes for mutual fund firms and their stakeholders this study adds fresh perspectives to the existing literature by adopting the portfolio and seven-strategy based approach.