Investor confidence and mutual fund performance in emerging markets

Abstract

Purpose The purpose of this paper is to investigate the impact of investor confidence on mutual fund performance in two relatively vulnerable but leading emerging markets, India and Pakistan. Design/methodology/approach A pooled ordinary least squared (OLS) model is used to look at two alternative measures of investor confidence and test for the relationship between investor confidence and mutual fund returns. To check the robustness of the findings, the authors also implement two-stage least squares and generalized method of moments techniques to control for unobserved heterogeneity, simultaneity and dynamic endogeneity problems in the regressors. Findings The paper finds that the returns of mutual funds are positively associated with investor confidence and an interaction effect exists between investor confidence and persistence in performance. The paper also confirms that returns from mutual funds are associated with different fund characteristics such as fund size, turnover, expense, liquidity, performance persistence and the fund’s age. These findings remain robust to alternative model specifications and measures of investor confidence. Originality/value While the previous literature mainly focuses on mutual fund characteristics and the macroeconomic determinants of mutual fund returns, this paper demonstrates that investor confidence plays an important role in determining mutual fund performance. The authors attribute this finding to two relatively unique features of the emerging markets in the study. A lack of awareness of mutual funds as being a low-cost investment vehicle and the interplay of cultural and behavioral changes have prevented investor’s savings from being channeled into investment products, away from gold or property.

Will the Winner Still Be the Winner? A Study of Equity Mutual Fund Performance in Indonesia

“…Wattanatorn et al (2020) notify that some fund managers frequently terminate their worst underperforming funds. Based on research on a sample free of survivorship bias, Nguyen et al (2018) demonstrate that the predictability in equity funds' mean and risk adjusted-returns can be explained by common factors in stock returns and investment expenses. Nguyen et al (2018) also add that stock selection skill cannot affect the consistency of mutual fund performance.…”

“…Based on research on a sample free of survivorship bias, Nguyen et al (2018) demonstrate that the predictability in equity funds' mean and risk adjusted-returns can be explained by common factors in stock returns and investment expenses. Nguyen et al (2018) also add that stock selection skill cannot affect the consistency of mutual fund performance. This also supported by Rao et al (2017) and Wattanatorn et al (2020).…”

“…For the benefit of research on mutual funds to potential investors, Deb (2019), Nguyen et al (2018), Rodriguez and Joseph McCarthy (2015) and Rao et al (2017), Vidal-García et al (2016) suggest that investors should consider more than recent past performance before choosing from the available mutual funds. They should also consider other issues such as recent trends in the overall stock market and the investment policy stated in the prospectus of mutual funds.…”

The EU sustainable finance taxonomy regulation

“…12 We introduce the definition of greenwashing in Chapter 6, under section 6.1. The TR recognises that lack of investor confidence would have a major detrimental impact on the market for sustainable investments 13 (Nguyen et al, 2018;Alewine-Stone, 2013).…”

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“…The authors also found that volatility, flows, size, number of stocks, and the expense ratio are important factors of modified turnover. Nguyen et al (2018) revealed that mutual funds returns are correlated with investor confidence, fund size, turnover, expense, liquidity, performance persistence and the age of funds. Apap and Collins (1994) scanned the returns of fifteen internationally diversified mutual funds and commented that the funds' performance is mostly likely driven by the benefits of diversification.…”