A study on Turkish mutual funds: value creation, performance persistance and survivorship bias of actively managed Turkish equity mutual funds and the supplementary value of sell-side research to mutual fund management, 2000-2007

Abstract

This study examines the value creation for investors in actively managed Turkish equity mutual funds during the eight year period between 2000 and 2007 using weekly returns. In the first and primary stage of this study, a survivorship free database is constructed and survivorship bias is calculated for different fund classes using raw fund returns, risk-adjusted fund returns, equal-weighted and size-weighted raw and risk-adjusted fund class portfolio returns. Then value creation by fund managers is evaluated using Jensen’s alpha equation for not only individual fund returns but also equal-weighted and size weighted fund portfolio returns. In addition, persistence tests are executed using parametric and nonparametric approaches. In the second and supplementary stage of this study, value creation for asset managers by analyst research is evaluated using qualitative research methods. Survivorship bias is calculated as 0.23%-1.53% for variable funds, 0.58%-6.58% for equity funds and 0.45%-3.49% for balanced funds. The magnitude of survivorship bias is higher than developed countries and the highest bias is in equity fund class. The average value of alphas calculated using different methodologies are found to be mostly negative indicating that on average funds earned less per year than they should have earned given their level of systematic risk during the study period. When fund class portfolio returns are used, there are barely positive alphas for sizeweighted equity (0.08%) and size-weighted balanced fund (0.03%) returns showing that large sized equity and balanced funds perform better than fund indices. In persistence analyses, all three fund classes are found to be persistent in the short-term and the source of persistence is persistent winners. Variable funds are significantly persistent for quarterly, annual and bi-annual periods. Equity funds are significantly persistent only for quarterly periods. Balanced funds are significantly persistent for quarterly and bi-annual periods but not for annual periods. As for the value of analyst research, it is found that buy-side professionals value sell-side research higher as long as it is well-regulated, independent and freed from motivational issues. Surprisingly, Analysis Dimension which is the first and foremost aspiration of research process is the last one in rank order showing that asset managers in Turkey do not grant value to sell-side research at face value, but selectively appreciate certain elements of it. All in all, there is partial and limited value creation in equity mutual funds in Turkey again with little supplemental value from equity research.