Start from Jensen (1968) , a large numbers of research about performance of the mutual fund has been done . However , there are only very less attention has been paid to the performance of the emerging funds over the forst month after inception . One exception is Blake and Timmermann (1998) who study a large sample of UK mutual funds . They found that new funds are less likely to have superior performance and report an average , risk-adjusted excess return of 0.8% in the first year . (hot)Bogle(1992) ranks the annual rank of over 330 equity funds for 10 years during 1981-1990 . By comparing the average ranking of top 20 funds from the former period , he found that no persistent in ranking from year to year .
(hot) The study of Lehmann and Modest (1987) can be considerate as one of the cornerstone of mutual fund studies and that was the first time when multifactor models are used as the measurement of the performance . The evidence of persistent is found but the authors mentioned that the results are highly depend on the performance metrics employed . They also stressed the need to find a set of benchmarks in order to be the factors that determined the return of the funds .
Nowadays , people are more likely to invest their money and trying to get extra return in order to spent more or to prepare for the future . There are a lots of investment vehicles including shares , bonds , money market , mutual funds , property and etc . One of the favorable vehicle is the mutual funds . After experienced the growing period of 1990-1996 , the East Asian countries started to consider mutual funds as one of the most important vehicles (3). Besides , those developing and emerging countries including India , China , Philippines , Indonesia and Malaysia are expected to grow by two digits annually and the total funds are expected to reach US 12 trillion by 2030 (6).
A mutual fund is a professionally managed portfolio that is invested by a funds pooled by individual investors (FMUTM). Mutual fund is able to diversify the risks by invest into different sectors including securities ( shares and bonds) , short-term money market instruments , commodities , property and even other mutual funds . In Malaysia , mutual funds are mainly divided into conventional and islamic mutual funds . Conventional mutual funds are allowed to invest in any sectors or vehicles .
On the other hand , islamic law suggested mankind of value actions not only on faith , but also on rational ground . This is initially about the benefits ( manfaah ) and disbenefits ( mudarah ) generated from a particular human action (11). The Qur'an prohibits the taking and receipts of interest (riba ) while making trade and commerce (al-bay) (11). Qur'an also argued that the interest profit generated by the loans are risk-free and no evidence showing that it is value-addition by the lenders so that this interest is considerated as an unfair business transaction (11). (secured)Islamic law and precepts constitute a part of every Muslim’s cultural and spiritual identity (DeLorenzo, 2002).
Malaysia first introduced Islamic banking in 1983 with the establishment of Bank Islam Malaysia Pte (BIMB) with the operations governed by the Islamic Banking Act 2985 . Islamic counters in mainstream banks introduced the the similar interest-free facilities . The islamic mutual fund can also defined as the mutual fund that is not allowed to invest in Qur'an prohibit sectors including alcohol , gambling , banking and finance sectors or any non-halal related industry . The islamic mutual fund is mainly focus on the muslim investors and provide them the correct way to invest which is following their religious teaching of the Islam . The mutual fund become an important component in 1980s but actually the mutual fund industry in Malaysia is more than 40 years old (Ramasamy and Yeung , 2003 ) . The Amanah Saham National (ASN) unit trust were launched in 1981 and it provided a new growth for the mutual fund industry in Malaysia ( Shamser et al., 1995 ) .
2.1 Mutual fund in Malaysia
(MFA)One of the ealiest study on mutual fund in Malaysia is Chua (1985) . With the samples of 12 malaysian mutual funds during 1974 to 1984 , he concluded that funds actually outperform the market and fairly consistent over time . High performance funds are likely related to the low expenses , low asset size and low portfolio turnover . Consistent with the study of Chua (1985 ) , (3)Tan (1995 ) also mentioned that government based funds perform better than private funds .
In the study of Ewe (1994) , 37 funds were taken as the sample in the period between 1988 -1992 . With the test by Jensen's Alpha Measure and Sharpe Index Measure , Ewe mentioned that the low forecasting ability of the managers caused the risk adjusted return overall were less than the stock market . Consistent with the study of Ewe , Shamsher and Annuar (1995) found that the returns of the 54 sample funds during 1988 - 1992 were below risk-free and market returns and he mentioned that the performance is inconsistent over time .
The studied conducted the performance of the malaysian mutual funds were comparing with the market benchmarks such as Kuala Lumpur Composite Index (KLCI) and EMAS Index ( Leong and Aw , 1997 ; Ch'ng and Kok , 1998 ) . These researchers have used more than one kind of market benchmarks for the performance measurement while studies before 1997 were mainly concentrated on the board market index such as KLCI .
In the later study of Shamsher and Annuar (2001) with the sample size of 41 non-government based mutual funds durong 1995 -1999 , they reported that both active and passive funds perform equally well but underperform the market portfolio . They further noted that if investors preferred actively managed funds over passive funds , the growth rate of the funds should more important than the income of the funds .
A study by Fauziah et al. (2002) , noted that mutual funds returns are not significantly above risk free and market returns while their study is based on 78 funds during 1990-1999 . They do not found evidence for the consistent performance of the funds over time and the forecasting ability of the managers . However , caution should be taken in interpreting their results because the financial crisis period (1997-1998) were also included in the research period and it is possible that the crisis influence the statistical results .
2.2 Investors' ability to choose
Nowadays , more people start to know and invest in mutual funds . It is because mutual fund provide more diversification and less risky investment . How are the investors choose the mutual fund ? There is a strange result given by Wilcox (2003) , he found that investors with more financial knowledges are less likely to make reasonable choices of funds (21) . It may because the actual informations , statistical datas or even previous performance results are less likely to help them to choose the correct funds . Customers are warn that previous returns or performances do not guarantee the future performance but a survey of 298 investors found that the performance track record is one of the most important criteria for mutual fund selection (Capon et al., 1994) (6). It seems paradox , investors might infer that the current-year performance may influence the performance of next year and the next year performance may influence the subsequence year and so on (Jan & Hung,2004)(21).
Barber et al. (2005) found that the purchase decisions of the investors are influenced by the "salient attention-grabbing information" (p.2095) that does not satisfied the "potray adequate fund information " (21). People also choose the mutual fund because it is more defensive compare to the other investment vehicles espeacially islamic mutual funds . It is because islamic funds do not allowed the islamic to invest in those entertainment and finance sectors which are high risk sectors so that the movement of the price is less fluctuation .
2.3 Performance of the Mutual Fund
In the Malaysia context , the mutual funds or more commonly known as unit trusts among locals , were concluded that on average , the funds were unable to beat the market (Shamsher and Annuar ,1995; Tan ,1995;Leong and Aw,1997; Annuar et al., 1997 and Low and Noor A. Ghazali ,2005) (4.5). Similar finding is found by Chua et al. (1985) and Koh et al. (1987) that the mutual funds in Singapore were also unable to beat the market (4.5). Adversely , Chua (1985) found that the mutual funds are able to overperform the market during his study period (1974-1984)(3). He concluded that the funds were able to beat the market because the fund managers diversified and controlled the risk of the mutual funds very well .
Ewe (1994), Shamsher and Annuar (1995), and Tan (1995). Shamsher and Annuar (1995) reported that their study on the performance and the return on investment of the 54 unit trust are well below the risk-free and market returns in the period of late 80s to early 90s (3). Tan (1995) concluded that unit trusts that he studied in 1984-1993 , in general perform worse than the market portfolio but consistent with Chua's findings , he concluded that the government sponsored funds perform better than private funds (3).
(030)In the research done by Abdullah et. Al. (2002) on 67 Malaysian mutual funds including 14 islamic and 53 conventional funds , he found that both islamic and conventional funds underperformed the KLCI benchmark by using multiple performance measures including Sharpe Ratio , the Modigliani Measure and the Information Ratio . They also mentioned that the returns of islamic and conventional funds are almost the same but when taking risk into account , Islamic Equity fund perform better than conventional funds during bear markets and vice versa .
2.4 Persistent Performance of the Mutual Fund
The performance persistent of the mutual fund is difficult to be determined and detected . It is much depends on how one is measuring the performance or where is the sources of the informations that are used ( Elton , Gruber, & Blake,2001; Elton , Gruber, & Green,2007; Gregoriou,2006; Redman & Gullett, 2007)(21). The consensus of the financial community is that some aspects of the positive persistent can be found , but only in the short-term (one year or less) , (Carhart, 1997; H.-L. Chen, Jegadeesh, & Wermers, 2000; Umamaheswar Rao, 2001) while others found evidence of positive persistence extending out to three years (W. G. Droms & Walker, 2001; Elton, Gruber, & Blake, 1996), but no evidence of persistence at the four year or beyond mark (21). There seems no evidence of the positive persistent both short-term and long-term . Carhart (2007) found that there is a continued underperformance by the worst-return mutual funds (21).
Goetzmann and Peles said " One of the greatest myteries in the mutual fund industry is why some of the investors stay with the funds that consistently perform poorly" (1997,p145) (21).
Millstone (2008 ) mentioned that the performance of the fund persist only for short term , so that the investment "buy-and-hold" strategy may not suitable for mutual funds investment . In other words , mutual fund investment can be considerated as more suitable in short-term . Furthermore , he also mentioned that there are some investors keep the bad performances funds for years , it is believed to be the phenomenon of "buy , hold and forget " strategy so that they do not concern about the performances even the fund persistent negatively .
Besides , many investors use rating services to help them in the investment decisions (41) . Russel (2006) found that there are very less funds were able to maintain the ratings even for only few months . Thus , investors using those rating services to help them to make investment decisions that do not reflect superior returns . He concluded that those rating services do not foretell the future or even mislead the investors and give them the false sense of confidents .
Another study by Adkisson and Fraser (2003 ) looked at the recent change in one of the rating service , Morningstar . They found that the service may be useful buy but to the investors it still contains bias which will results in inconsistent comparison among different groups of investors . Chiang et. al., (2005) warned that rating services should not be the only criterion to select funds . Their study shown that the ratings do not consistent through time and even prove disadvantages to the investors .
2.5 The performance of the mutual fund during financial crisis period
Corsetti , Pecenti and Roubini (1999) and Alon and Kellernan (1999) unveil the contagion effect in Asian Economies and reminiscent the 1960's Domino Theory . (41)
The theory mentioned that the economies are geographically and structurally to follow and influence each other thoughout the business cycle . Countries located within a given region , especially developing nations are normally rise and fall together in their economies . He also mentioned that since the Asian tiger economies maintained high growing rates during 1990's , investors konw that if one regional economy collapses , the rest would follow .
(41)Yeh , Suwanakul and Chun (1999) noted that one of the reasons of financial crisis is the quality of credit management . The Asian banks exhibit poor risk management as they disregard the credit-worthness of the borrowers . He also mentioned that credits are made on the basis of relationship or collateral but not credit analysis . Issuing and incresing bad credits caused the bubbles ( equities , properties , real estates ) that worsen the non-performing loans of the regional banks . So when the bubbles burst , the collatered assets are not worth the loan values ( Sarno and Taylor , 1999). While East Asian have their regulations and laws , most of the banks are government owned or heavy related to the government so that the setup let them to overextend domestic credits ( Barth et. Al. , 1998 ) .
(1)Hassan and Mohamad (2007) found that conventional funds are likely to be performed better than the islamic funds during the bullish market which is upward market because conventional funds are able to invest in any sectors incudong those high risks exposure . Other research also consistent with this , for example (bhatti)Fikriyah et.al. (2007). On the other hand , Abdullah (2002) noted that islamic funds perform better than the conventional during bearish market which is also can be understand as the financial crisis period . He also mentioned that if the risk are not takind into account , the performance of both islamic and conventional funds are likely the same .
Besides , their research is also consistent with the other research , they also found that the islamic funds performed better bearish market or downward market . It is because the investment of Islamic funds prohibited the usury , gambling , finance and ambiguity or uncertainty elements and sectors , so the the islamic funds have the lower risks exposure than the conventional funds and therefore are able to minimize the overall risk level .
Ong(2000) studied the performance of 53 unit trusts before and during the 1997-98 financial crisis , he found that the Malaysian unit trust during the crisis is better than before crisis (3) . Also , consistent with other previous researches , he found that the government-sponsored funds are able to perform better than the private or common funds before the financial crisis period . But the government-sponsored funds perform reversely during the crisis period . Besides , he also found that the size of the funds do not contribute to the performance of the funds .
2.6 The factors that affect the performance of the mutual funds
There are some past research that studied about the factors that affect the performance of the mutual fund . (6)Petersen et al. (2001) and Israelsen (1998) reported there are some factors that affect and influence the performance or the current mutual fund including previous performance , management style , expenses , manager tenure and fund age . (21)According to West and leonard-Chambers (2006) , the most interested information is the risk/reward summary of a mutual fund which is required by law and have to appear at the front of every prospectus . He also found that nearly 75 percent of the investors researched the fund's fees and expenses to invest and more then 66 percent reviewed the past performance of the fund.
2.6.1 The past result
The past performance result directly shown that the performance of a mutual fund but the past performance do not guarantee the current or future performance . Some literature found that the previous performance generate only a slight positive relationship or no relationship to the current returns (Blake et al., 1993 ; Bogle, 1992 ; Brown and Goetzman, 1995 ; Brown et al. , 1992 ) (6).
Persistent of the fund can be explained to be the continued performance of the mutual fund . There are researches shown that the persistent of the funds are visible but only in short-term ( one year or less ) (Carhart, 1997; H.-L. Chen, Jegadeesh, & Wermers, 2000; Umamaheswar Rao, 2001) (21) . In the researches of W. G. Droms & Walker (2001) , Elton, Gruber, & Blake(1996) , they are able to found positive persistent extending to three years .
The past performance of the mutual fund managers failed to ensure the future performance because the superior performance also related to luck versus any ability in stock or portfolio selection and market timing ( Malhotra & McLeod , 1997 ) (21). However , (canadian)Grinblatt and Titman (1992) are able to find significant envidence that shown the persistence in worst performance funds . Droms and Walker (2001 ) also reported that their five-year research shown that some persistent only for poor performers (canadian).
Not only the characteristic of the manager is studied but also the characteristic of the fund itself . By looking at the asset size , turnover , the makeup of the portfolio included variables including book-to-market value , momentum , size , expenses and operating costs (Dowen & Mann , 2004 ; W. G. Droms & Walker , 1995;Indro , Jiang , Hu & Lee, 1999; Otten & Bams, 2004 ) (21) . (21)Sing (2007) conducted a numbers of studies and found that large funds overperformed small funds (in Singapore ) but it was not significant for all periods or locations .
The past performance of mutual fund managers failed to provide good performance in the future and this statment could inply that the performance of a fund is atributed to luck versus any other skills in stock selection and market timing ( Malhotra & Mcleod , 1997 ) . (41)Umamaheswar Rao (2001) mentioned that a trading rule can be made through the past performance only if the investors reference is short - one year or less .
In the study of Gotzmann and Ibbotson (1994) , it was the first time that mutual fund literature is controlled for momentum effect . They wanted to discriminate the one-month persistent is due to momentum effect or long-term phenomenon , they used a randomization test to test whether the preceding month return is related to the persistent . They found that the previous month's ranking have the power to predict the next month's ranking and it is not caused by the differences in long-term means .
Russel (2006) mentioned that some of the investors use the mutual fund rating services as one of their aid in investment decisions for example the Morningstar rating service . He noted that few of the funds were able to maintain their performance even for a few months and the rating does not contribute to the future performance but it actually give false sense of confidence to the investors . Change et al. (2005) warn that the rating services should not be used as the only criterion of fund selection .
2.6.2 Expenses
Expenses of a mutual fund are generally include administrative costs , audit's and legal fees , promotional expenses and rewards for managers . Good performance of a fund will lead to the rewards to the manager which will actually increase the expenses of the fund . The question raised when managers received large rewards from the fund through the expenses and fees but they actually underperform or failed to best the performance of the fund of a passive strategy ( Berk & Green, 2004 ) (21).
There are still some researched reported that higher expenses are related with greater rewards . It is because the high expenses generated are the rewards for the managers when they are able to perform well (W. G. Droms & Walker , 1996)(21). The expenses is directly deducted from the asset of the fund so that expenses will also directly reduce the profits or the performance . (6)Elton et al. (1993) and Ippolito(1989) also supported that that funds with a lower transaction cost can actually overperform those with higher fees . (21)Friis and Smit (2004) mentioned that it is better that the investors buying low expenses index funds rather than choose by fund managers because he found that very little performance could be attributed to the fund manager . To reduce the costs of information acquisition and monitoring , investors are recommeded to invest in funds with stronger governance systems (Leuz , Lins and Warnock , 2007) .
(41)Elton , Gruber and Blake (1996) studied at the funds that is in the lowest decile and they found that most of the funds have the highest expenses . A sale representative is usually entitle with a sales charge , distribution fees or both . In the study of Apap and Griffith (1998) concluded that there is no significant relationship between sales charges and total returns and they add that sales charges will not enhance investors performance . Droms and Walker (1994) and Grinblatt and Titman (1994) who found that there are no such relationship is existed while Ippolito found positive relationship between the performance and the expenses of a mutual fund . Conversely , Lin(2006) actually found an inverse relationship between the performance and expenses .
(21)Some studies shown that , active management strategies can outperform the market but cannot overcoming the associated expenses and fees ( Elton et al., 1996 ; Henriksson, 1984 ; Wermers , 2000 )
2.6.3 Size of the Fund
Some studies (6)( Cicotello & Grant , 1996 ; W. Droms & Walker, 1994; Gallagher , 2003; Grinblatt & Titman, 1994) found no relationship between fund size and performance . They mentioned that fund size do not represent everything , fund size do not represent high expenses or high performance . When fund newly issue , the growth provides cost advantages because growth increases net returns . However , uncontrolled growth in fund size encountered some costs and expenses disadvantages that reduced net return of the fund . They also found that when a fund reach the perfect size , the marginal returns will begin to decline or become negative .
Larger fund do encounter more expenses because the large fund company employs more employees including those administrators , researchers and need more marketing promoters . Shukla and van Inwegen (1995) mentioned that larger funds are able to employ more research staff who are able to provide more informations that lead to better portfolio selection . It is supported by other studies (Chen et al., 1992 ; Ang et al., 1998 ; Golec , 1996 ) .
Sing's (2007) studies also found that returns of the mutual fund are no related to the fund size over the period studied . On the other hand , (6)Chen et al. (1992 ) found that larger funds performed better than small funds . Additionally , (6)Dowen and Mann (2004) also found that larger funds and managers are able to generate greater returns at lower costs . Large mutual fund able to overperform the market , another reason is they are able to employ more research staff to analyse and provide the correct information and let the manager to have better portfolio selection and to make correct decision immediately (Shukla and van Inwegen , 1995 ) (6). (2) Besides , Bae , Slulz and Tan (2005) , Malloy (2005 ) and Orput (2004) found that local financial analyst also contributed to the performance of the fund . They found that local analysts have significant local advantages over non-local analyst so that they are able to provide more accurate earnings forecasts of the local firms .
(22)Zhu (2002) argued that he did not found evidence od local investors taking local advantages of the informations and argues that familiarity drives local bias in investment activites . (22)Chad , Jagannathan and Ofer (1988) and Lee and Choi (2002 ) mentioned that large firms have greater coverage in financial media and they have a greater numbers of analysts so that they need to access to capital market more frequently but they are also watched more closely by wall street and disclose more informations to the investors . So that they argued that larger firm are associated with less asymmetric informations than the small-size firms . (22) Consistent with this theory , Beasley (1996) and Klein (2002) reported that firms with good board structures are more likely to outperform those with weaker board structures .
Some of the researchers believe (94051276)(Andre Perold and Robert S. Salomon , 1991 ; Roger Lowenstein, 1997 ) , there is a large asset base influence the fund performance negatively because of trading costs accociated with price impact or liquidity . A small fund can easily put all the fund to invest into the best ideas but the large funds are lack of liquidity so that they are forced to invest in not-so-good ideas therefore the performance is declined . Grinblatt and Sheridan Titman (1989) found evidence that fund returns decline with the size of the fund but there is no consensus on this issue .
(94051276 )Stein (2002 ) mentioned that those large organizations with hierarchies , the agents are fighting for their ideas to be implemented will affect agents decisions and what they want to work on . Stein (2002) argued that with such hierarchy costs , small organizations ought to outperform large ones at tasks that involve the first ideas delivered by the agents . It is because the ideas are hard to be understnad by the others and pass the idea up to the organization . Stein (2002) also mentioned solo-managed funds are more loikely to outperform the co-managed funds .
