Mutual Fund Performance in Emerging Markets: Thailand

Abstract

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 research specifically investigates mutual funds in one of the emerging economies, Thailand, using a more extensive data-set than previous studies; it controls for investment policy and tax-purpose differences, as unique characteristics of mutual funds in Thailand. We will 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 will also explore the impact of liquidity on performance and performance measures.

For a long time, mutual fund investment has played an important role in the financial market and its popularity has increased dramatically over the past decade. In the US, mutual fund companies are the largest institutional investors in the stock market and hold more than a quarter of the stocks. The welcome given to mutual funds is attributed to its various benefits, such as its diversification, professional management, liquidity and flexibility and convenience. In addition, mutual fund investment is important to the equity market and to the growth of the economy, since they are held by institutional investors who hold a significant portion of capital assets.

Despite the popularity and importance of mutual fund investment, the notion of modern portfolio theory (MPT), which explains the relationship between risk and expected returns and also the famous efficient market hypothesis (EMH), which suggests that stock prices fully reflect information are also a challenge to the studies in mutual funds and shift the fund performance measurement from the calculation of crude returns to detailed explorations of the risk and returns methods. More recently, studies in mutual funds have become central to the performance of mutual funds. Some studies try to find a model in evaluating mutual fund performance. Others explore whether fund managers can create value added for investors and ways to succeed in this. Other studies still investigate whether mutual fund performance can be explained or forecast by any particular factors.

Nonetheless, due to the availability of the most of the data, these studies tend to be conducted within the developed markets and only minor studies have focused on the mutual funds in emerging markets. In addition, studies in the emerging markets still take the prevailing approach and concentrate on showing how fund managers perform, neglecting other relevant issues. Therefore, we still know too little about mutual fund investment in emerging markets and this can impede the development of this industry.

In spite of the limited evidence about the behaviour of mutual funds in emerging markets, mutual fund investment in these areas has grown markedly over the past decade at a quicker pace than even the developed markets have shown. The growth in mutual fund investment is influential because it shapes the future development in the securities market and has important policy implications. The high proportion of institutional investors creates more timely information and therefore makes the market more efficient. However, it tends also to encourage irrational behaviour, such as herding, which makes the market more volatile. Additionally, the excessive growth is liable to inflate stock prices and makes the market more vulnerable, since it does not have enough capacity to anticipate the high inflows.

Furthermore, mutual fund industries in emerging markets display some unique characteristics which are different from those in developed markets and these, too, challenge the assumptions in this respect. For instance, mutual funds in emerging markets are less competitive and information is less publicly available than elsewhere. Investors are more passive and likely to make their decision on the basis of familiarity. Moreover, mutual funds in some countries are used as part of the national financial policy, which differentiates mutual fund styles even further. For example, in Thailand, the government gives favourable tax treatment to a specific type of mutual fund in order to encourage retirement and long-term savings. Thus, these conditions potentially impact on performance and stock selection strategy, as well as decision behaviour.

More importantly, while most of the theoretical models which we use to evaluate mutual fund performance is based on assumptions of efficient markets, emerging markets fail to meet these assumptions. Returns in emerging markets suffer from several chronic conditions such as high volatility, high trading cost, non-normality, and infrequent trading. Furthermore, there is still some doubt whether the factors documented in developed markets can also explain stock returns in emerging markets.

Thus, the study of mutual funds in emerging markets is overdue for those who need a fuller understanding of their investment conditions. In addition, this would allow an out of sample test to challenge existing asset pricing models and lead to the development of new empirical models. This study seeks to shed light on mutual fund investment in emerging markets and specifically focuses on three issues: performance, determinants of performance and the role of liquidity on performance and performance measure. Since mutual fund data from all emerging markets are segmented and hard to obtain and also that policies and regulations are different for each country, the scope of the present study rests solely on an emerging country, namely, Thailand and it is treated as a case study typical of the emerging markets as a whole.

Although the characteristics of emerging markets are relatively diverse, Thailand can represent the rest of the emerging countries, those in Asia in particular. This is because the Thai stock market exhibits several behaviours which are consistent with the average for emerging markets.

In addition, Thai mutual funds play an important role in the capital market and Thailand’s economy is among the three fastest growing in the Asia/Pacific region. The data on mutual funds and the stock market, as well as other relevant information from Thailand, are sufficiently accessible and more complete than from many other emerging countries and thus allow us to make more comprehensive investigations of mutual funds in emerging markets.

Keywords: Financial Services,Thailand, Mutual Funds, SEC, Emerging Market

JEL Classification: G00, G02, G14, G15, G29