Conditional Alpha and Performance Persistence for Indian Mutual Funds: Empirical Evidence

Abstract:     
Do Indian mutual fund managers contribute to the better performance? In this paper, we address this question and measure the performance of Indian mutual funds in the conditional framework advocated by Ferson and Schadt (1996); Christopherson, Ferson and Glassman (1998). We find that when the beta of the fund is conditioned to lagged economic information variables, the fund performance does not change appreciably. However, when fund alpha is also controlled for these information variables, the fund performance on an average becomes significantly negative. This finding has enormous economic significance. The result shows that on an average the Indian mutual fund managers only captures the opportunities from the available economic information, they do not contribute anything beyond it. This paper utilizes a sample of 133 open-ended Indian mutual fund schemes, over the period of 1999:1 to 2003:7 for the study. The broad based S&P CNX 500 is used in the study as benchmark. The study uses the lagged information variables - interest rates, dividend yields, term structure yield spread and a dummy for April-effect.

This paper also examines the evidence of persistence in the performance of the Indian mutual funds. Our approach to measure performance persistence is based on cross-sectional regressions of future excess returns on a measure of past fund performance. Both unconditional and conditional measures of performance are used as measure of past fund performance. We use the methodology of Fama and MacBeth (1973) to test the hypothesis. We find the evidence that conditional measures of past fund performance predict the future fund returns significantly. In the present study, the horizons of future return are considered as 1, 2, 3, 6, 8, and 12 months and the past performance is measured for previous 18 months. Between the two different conditional measures of past performance, time-varying conditional alpha is found to be a better measure in indicating persistence in performance of Indian mutual funds. We estimate the standard errors t-ratios using the heteroskedasticity-consistent and autocorrelation-adjusted estimation techniques of White (1980), Hansen (1982) and Newey and West (1987).

Keywords: Mutual fund, performance measure, conditional alpha

JEL Classifications: G14, G20, G23

Accepted Paper Series