Performance appraisal of New Zealand managed funds: an empirical study

Abstract

Professionally managed investment vehicles such as mutual funds have become one of the most prominent forms of retail investment in the global capital markets. While these actively managed funds represent one of the fastest growing sector in the American financial markets, investments in mutual funds have only recently begun to gain popularity in the New Zealand market. Spurred by the economic reforms that was put in place during the late 1980s, mutual funds were soon regarded as a viable alternative long term investment strategy by many small and medium scale investors.

Despite the increasing importance of mutual funds in New Zealand, empirical studies documenting the performance of the New Zealand managed funds industry remain rare. Most of the existing New Zealand-based studies to date concentrated solely on the tests of fund performance persistence. There has been relatively little research carried out examining the longitudinal and cross-sectional performance of New Zealand managed funds. This study therefore addresses this issue by empirically examining whether or not New Zealand fund managers possess the skills necessary to generate superior returns for investors after having accounted for the transaction costs involved, such as management fees.

While this topic has been extensively researched in the U.S. context over the past three decades, there is still no unanimous consensus in the literature to date supporting the assertion that active portfolio management can consistently provide investors with positive abnormal returns. Further, the process of fund performance appraisal has been significantly complicated, both at the theoretical and empirical levels, by the measurement problems and issues on proper risk adjustment procedures. As such, this study seeks to examine the absolute performance of two fund classes, namely NZ Equity Trusts and NZ International Equity Trusts, by using a number of performance measurement models.

Three performance measures were selected as being the most appropriate measures for this study due the problem of data availability: the Jensen measure (1968), Treynor-Mazuy (1966) market timing model and Henriksson-Merton (1981) market timing model. These models were applied to the examination of the performance of 36 New Zealand equity funds and 56 New Zealand-based international equity funds for a ten-year period, from 1989 to 1998.

Overall, evidence was found to suggest that New Zealand domestic equity fund managers possess relatively poor overall forecasting skills and stock selection skills but superior market timing skills required to outperform the market. Similarly, New Zealand international equity fund managers were found to possess relatively poor overall forecasting skills and stock selection skills, but not to exhibit any superior market timing skills necessary to provide investors with abnormal returns, vis-á-vis their respective country/region equity indices.