Selection and Timing Capabilities of Investment Managers and Above Market Return

Abstract

The performance evaluation of investment managers has been a widely discussed issue in the field of finance. The investment performance of portfolios has been extensively examined for the developed capital markets. The portfolio theory suggested by Harry Markowitz gave a new direction to the evaluation of portfolio performance, which has completely revolutionized the thinking on the issue. The advanced research work on performance evaluation of investment managers has contributed a lot to the wealth of knowledge. The purpose of this study is to evaluate the role of selection and timing skills of investment managers in earning the above market returns apart from the usual ups and downs in the stock market. The study is primarily based on the stock market data and analyzes a hypothetical portfolio against the top performing mutual funds. The hypothetical portfolio is constructed on certain important assumption that have helped in determining the maximum market potential so as to evaluate how much segment of this return was captured by investment managers and whether or not they have been able to utilize their skills. The methodology used is not very complex and is based on basic financial models; however, the analytical mode has been highly functional meaning that qualitative research has been equally important as the quantitative one. The first chapter of the research provides an overview of the topic so as to enlighten the reader about the specific scope that this research entails. The second chapter of the research is the literature review that incorporates various researches that have been done previously on the same or similar topics. Some of these researches have shown that the selection and timing skills of the investment managers have a significant role to play in earning the above market returns. However, others have shown that above market returns are earned only by chance or luck and investment managers have no unusual earning capability that is also reflected by their inconsistency in performance. The third chapter talks about the methodology used for carrying out the research whereby the hypothetical portfolio is made on the assumption that next year’s returns were known in advance so that the portfolio is reflective of the maximum market potential. This portfolio is than evaluated for different compositions of the selected securities to evaluate risk and return v | P a g e characteristics of various weightages and develop an efficient frontier, so that the investment point can be decided. The fourth chapter is the analysis of the data gathered. The next step involves selection of five top performing mutual funds and determining the risk and returns characteristics of their equally weighted composition and analyzing its performance against the hypothetically constructed portfolio so as the draw results. The research is concluded in the fifth chapter that draws tentative results and findings regarding the timing and selection skills of the investment managers. All the supporting workings are appended at the end of report.