Thai Mutual Fund Performance Skill or Luck

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Using a data set on Thai open-end domestic equity funds over the June 2000 to October 2007 period. We apply a Bootstrap methodology to distinguish between “skill” and “luck” for the individual funds. A Bootstrap approach is necessary because the nonnormal distributions of individual fund alphas. This study points to the existence of genuine stock-picking skill among the top performing Thai equity mutual funds, performance which is not solely due to good luck. At the bottom fund, our analysis strongly rejects the hypothesis that most poor performing funds are merely unlucky. Most of these funds demonstrate “bad skill”. 1

Equity fund is a fund that has the investment policy with an objective to invest in or hold equity instruments during each fiscal year in an average amount of not less than 65% of the net asset value on fund. Normally, equity fund is more risky than any other investing types of mutual fund. Equity fund is appropriate to investors who can accept high risk and invest for good return in the long run. By October 2007, there are 146 equity funds in Thailand, most of these funds have been continuously managed since prior to year 2000, which constitute total net asset value around 100,000 million baht and will keep growing in the future Definitely, investors want to invest in a fund which has the highest return, higher than benchmark but with lower risk. In Thailand, the Stock Exchange of Thailand Index (SET Index or SET50 Index) is an approved benchmark for equity fund performance measurement. Therefore, there are several factors that investors should know before making decision to invest with any equity fund. The factors to be considered are 1) Fund manager‟s performance 2) Stock-picking skill of fund managers and 3) Performance persistence of fund. Fund manager performance is the past return from investing in that fund, which results from fund managers‟ investing decision. Investors should invest in the fund that is capable of achieving higher return than market benchmark and also concern on risk taking of the fund. True stock-picking skill of fund manager results in good returns to investors without relying on luck. The superior fund performance may come from the managers‟ skill in identifying underpriced stocks or the manager may not have true stock-picking skill and is just the luckiest of a large group of fund managers. Performance persistence shows how fund managers can continuously keep good returns from the prior year. Knowing these information is definitely useful for investors in better making decision to invest in which equity fund. There are several recent researches documenting that subgroups of fund managers have superior stock-picking skills. However, past studies of mutual fund performance do not explicitly 2

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. These models discount the possibility that luck can also persist. When outlier funds are selected from such an ex post ranking of a large cross section, the separation of luck from skill becomes extremely sensitive to the assumed joint distribution from which the fund alphas are drawn. Any such analysis must account for nonnormality in this distribution, which, as we will show, can result from (1) Heterogenous risk-taking across funds and (2) Nonnormally distributed individual fund alphas. The key of this study is the Bootstrap analysis that allows us to precisely separate luck from skill in the complicated nonnormal cross section of ranked mutual fund alphas. In contrast to earlier studies which use conventional statistical measures, often applied to portfolio of funds, we apply the Bootstrap technique to the weekly returns of Thai open-end, domestic equity funds during the 2000 to 2007 period. This enables Luck distribution of any chosen funds to encapsulate possible...
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