Selectivity and timing performance of UK investment trusts |
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| Authors: | Kenbata Bangassa Chen Su Nathan L Joseph |
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| Institution: | 1. University of Liverpool Management School, Chatham Street, Liverpool, L69 7ZH, UK;2. Newcastle University Business School, 5 Barrack Road, Newcastle upon Tyne, NE1 4SE, UK;3. Aston Business School, Aston University, Aston Triangle, Birmingham, B4 7ET, UK;1. Departamento de Electrónica, División de Ingenierías Campus Irapuato-Salamanca, Universidad de Guanajuato, Carretera Salamanca-Valle de Santiago Km 3.5+1.8 Km, Comunidad de Palo Blanco, Salamanca, Guanajuato 36885, Mexico;2. Facultad de Ciencias Físico Matemáticas, Universidad Autónoma de Nuevo León, Av. Universidad s/n, Cd. Universitaria, San Nicolás de los Garza, Nuevo León 66451, Mexico;3. Departamento de Estudios Multidisciplinarios, División de Ingenierías Campus Irapuato-Salamanca, Universidad de Guanajuato, Av. Universidad s/n, Col. Yacatitas, Yuriria, Guanajuato, 38940, Mexico;1. School of Risk and Actuarial Studies and CEPAR, Australian School of Business, University of New South Wales, Sydney, NSW 2052, Australia;2. Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, United Kingdom;3. Department of Applied Finance and Actuarial Studies, Faculty of Business and Economics, Macquarie University, Sydney, NSW 2109, Australia |
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| Abstract: | This study examines the selectivity and timing performance of 218 UK investment trusts over the period July 1981 to June 2009. We estimate the Treynor and Mazuy (1966) and Henriksson and Merton (1981) models augmented with the size, value, and momentum factors, either under the OLS method adjusted with the Newey–West procedure or under the GARCH(1,1)-in-mean method following the specification of Glosten et al. (1993; hereafter GJR-GARCH-M). We find that the OLS method provides little evidence in favour of the selectivity and timing ability, consistent with previous studies. Interestingly, the GJR-GARCH-M method reverses this result, showing some relatively strong evidence on favourable selectivity ability, particularly for international funds, as well as favourable timing ability, particularly for domestic funds. We conclude that the GJR-GARCH-M method performs better in evaluating fund performance compared with the OLS method and the non-parametric approach, as it essentially accounts for the time-varying characteristics of factor loadings and hence obtains more reliable results, in particular, when the high frequency data, such as the daily returns, are used in the analysis. Our results are robust to various in-sample and out-of-sample tests and have valuable implications for practitioners in making their asset allocation decisions across different fund styles. |
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