Effects of human capital and fund characteristics on mutual fund performance in Malaysia

Introduction

Mutual fund is an investment vehicle for investors to yield savings and diversification. The growth of fund investments has been astounding, not only in developed countries but also in emerging markets. The unit trust industry in Malaysia has experienced phenomenal positive growth in NAV of RM536.86 billion in April 2021, and the percentage of NAV to Bursa Malaysia market capitalization showed increasing trends, from 27.36 percent in 2011 to 29.20 percent in April 2021 (Securities Commission Malaysia, 2021). Nevertheless, this growth figure was rather low compared to other advanced and mature markets. The total net assets of mutual funds managed by US investment companies in April 2021 reached more than $25.5 trillion (USD) (Investment Company Institute, 2021), while European countries achieved $14,447.20 billion (EUR) in March, 2021 (European Central Bank, 2011). This indicates that the unit trust industry is still in the infancy stage in Malaysia.

Nevertheless, uncertainty and reduced stability in the global financial marketplace during the COVID-19 pandemic, have given rise to tremendous challenges in the fund industry. Investors have become impatient, especially with the underperformance of funds, putting them at odds with funds managers (William, 2017). Hence, investors are now not only focused on which funds perform better than others, but on who could persistently safeguard their investment portfolios during these turbulent periods. Hence, fund managers are expected to react faster and work under pressure in this competitive market to maintain and improve their positions (PWC, 2020). The investors pay great attention to who is delivering “alpha” in their investment portfolios. However, to date, no comprehensive study has examined the relationship of fund managers’ human capital characteristics with fund performance in Malaysia. Hence, this study proposes to integrate fund performances, managerial characteristics, systematic risk, expense ratio, and turnover ratio with single and simultaneous equations based on asset pricing models. This study attempts to fill this research gap. Therefore, the results are significant for the funds industry in emerging markets.

Methods

This study sampled a total of 240 domestic equity funds in Malaysia to measure the risk-adjusted performance of each fund, from January 2012 to December 2014. To avoid survivor bias, the sample excluded funds that have ceased to exist in the Malaysian fund market, and data only hold survivors’ funds. The fund performance measurements were Jensen alpha on a single-factor model (CAPM) and alpha on a Fama and French (1993) (three-factor model). The FTSE KLCI three-month Malaysian Treasury bill was chosen as a benchmark to proxy market indexes and risk-free rate of return. To address the simultaneous interactions among fund performance, systematic risk, expenses, and turnover, it is worth noting that Golec (1996) and Switzer and Huang (2007) performed single equations and simultaneous equations. Consistent with prior studies, this study performed single equations by using OLS regression and simultaneous equations estimation by 3SLS regression. STATA version 12.1 was used to conduct the statistical assessments.

All fund manager human capital data were obtained from secondary sources which are available for public access. The fund managers’ profiles, e.g., gender and education were retrieved, and hand-collected from each of the fund master prospectus and Morningstar; these data are under public access. Morningstar is a well-known Chicago-based financial services firm that provides in-depth analysis and rating system for fund performances and the fund managers investment experiences. Other human capital characteristics, e.g., investment experience and age data that are not publicly available in the Malaysian fund market, were obtained from a subscription to the Thomson One database and fund prospectus. In order to comply to the open data policy, the dataset was anonymised by attributing a number to each of the fund names; reviewers and readers may view and access the dataset without restrictions. Given that there is little and sometimes no available information on Malaysian fund managers’ age, to overcome this problem, Chevalier and Ellison (1999) and Atkinson, Baird, and Frye (2003) proposed an estimation of age by assuming that each fund manager was 21 years old upon graduation from college. Nevertheless, the average age of graduation for a Bachelor’s degree in Malaysia is approximately 24. Hence, this study estimated the fund managers’ age by adding 24 years to the number of years at work. Data on years of working experience were stated in the fund master prospectus. This research received approval number EA0372021 from the Research Ethic Committee of Multimedia University in Melaka, Malaysia.

Each of the fund managers’ human capital characteristic indicators were measured using a dummy variable, defined in Table 1. Furthermore, this study examined six fund characteristics in terms of their relationship with the fund performance (Switzer & Huang, 2007; Low, 2010). The fund characteristics data were sourced mainly from the respective fund master prospectus and annual reports of all fund management companies in Malaysia. To control the characteristics of the funds, the study classified the sample funds into two dimensions on the basis of the fund objective: growth fund and income fund dummy variables. The fund data are defined in Table 2.

Results and discussion

Table 3 reports descriptive statistics for fund performance, fund risks, and fund characteristics of the Malaysian funds industry. The average value shows a positive Jensen alpha of 0.0024, which indicates that fund managers possessed the best stock selection ability. However, there was a significant gap in the return performance between the best and worst fund managers. The average positive Alpha 2 of 0.0005 indicates that the funds slightly outperformed the market performance over the sampled period. The Beta of 0.5936 indicates that the mutual fund is relatively less risky than the market. The additional two risk factors, SMB with an average of 0.28 and HML was 0.56. Furthermore, the average value of the expense ratio was 1.8765 while the turnover ratio of sample funds was 1.0175 percent. The average fund had RM214.44 million in assets under management.

Table 4 reports the results among fund characteristics and human capital characteristics with the mutual fund performance (Jensen alpha) by using the CAPM single-factor index and alpha on Fama and French three-factor model on the single equation. The results showed that both fund performances were negatively related to fund expense, although only significant in Jensen alpha.

Fund age showed a positive correlation with both fund performances. This indicates that older funds generate higher returns. It is expected that older funds are more mature and established, and can keep the costs lower, which is in line with Gregory et al. (1997). On the other hand, the results revealed a significant, negative relationship between fund performances and fund managers’ possession of a business major degree and Master’s degree. Holding a Master’s degree decreased the Jensen alpha, which indicates that fund managers with a Master’s degree did not add value to their portfolio performance and their stock-picking ability. This result is consistent with Switzer and Huang (2007).

The age of managers showed a positively significant impact on both fund performances. This is consistent with Gibbons and Murphy (1992). The senior managers who are approaching retirement avoid poor performance which may hurt fund manager’s reputation and reduce their job prospects in the future. The manager team showed a positive relationship with both of the fund performances. This suggests that funds managed by a team tend to benefit the mutual fund. This is consistent with Berkowitz and Qiu (2003). On the other hand, team gender showed a negative impact on fund performances. This indicates that mixed gender in a team underperformed.

Table 5 presents an integrated model of fund characteristics, human capital characteristics, and mutual fund performance, in a simultaneous equation model.

Conclusions

A substantial emphasis is placed on how human capital roles can affect the ultimate work performance of an individual. To date, very little attention has been devoted to seeking empirical evidence for the effects of human capital managerial characteristics especially in the funds industry. Hence, this study identified that fund managers’ education, gender, age, and team managers are significant characteristics in explaining fund performance. Hence, this study provides greater support for human capital theory (Becker, 1964). Although the findings showed that gender is a significant variable in explaining fund performance, the study was unable to provide clear evidence on whether female fund managers in Malaysia outperform their male counterparts. Hence, the relationship between gender and fund performance might need further investigation. To develop a more efficient and competent funds market and financial system, Malaysian regulators need to strengthen fund industry policies and practices, so that typical agency problems, such as excessive managerial expenses and risk-taking can be alleviated.

Data availability