GRM 2010 GRM 2011

Abstract Details

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Title of Paper:
Stock Selection and Market Timing Ability of Saudi Mutual Fund Managers: Evidence from Islamic and Conventional Equity Mutual Funds
Paper Proposal Text :
Stock Selection and Market Timing Ability of Saudi Mutual Fund Managers: Evidence from Islamic and Conventional Equity Mutual Funds

Saeed Binmahfouz
Ph.D. Candidate
Durham University


The skills of mutual fund managers are divided into two components, stock selection ability and market timing ability. The former is the skills to identify underpriced securities, whereas the later is the skills to forecast the overall market movements, whether it is going to rise or fall, and adjusting the portfolio’s composition accordingly. If fund managers possess superior investment skills, they will earn abnormal returns relative to an appropriate benchmark. Although there is a large body of literature that has investigated the managerial skills of mutual fund managers in developed market, such issue has not so far been examined based on the Saudi market. Thus, the primary aim of the study is to provide new empirical evidence whether or not Saudi mutual fund managers, both Islamic and conventional, have the ability to generate superior returns and outperform the market. Also, the stud compares the managerial skills ability of the Saudi Islamic mutual fund managers to their conventional counterparts. Examining the Saudi market add another important dimension to the study from Islamic finance perspective since the Saudi market is by far the world’s largest home market for the Islamic mutual funds industry.

The study finds that both types of Saudi mutual fund managers, Islamic and conventional, do not seem to have superior stock selection ability. Furthermore, with regards to the market timing ability, there is evidence that, in most cases, both types of mutual funds, Islamic and conventional, are not successful market timers. This implies that the mutual fund managers in Saudi Arabia, Islamic and conventional, in general do not seem to have the ability to either anticipate individual securities’ prices or forecast the overall stock market movements. Hence, there is no evidence of superior investment talents among Saudi mutual funds managers. Furthermore, the study also shows that, in general, there is no statistically significant difference between Islamic and conventional mutual funds managers in terms of either stock selection or market timing ability. This is with some Islamic mutual funds are superior but others appear to be inferior compared to their conventional counterparts. The study also investigates the performance persistence of the Saudi Islamic and conventional mutual funds. The results suggest that there is no evidence of performance persistence that past mutual funds winners do not appear to continue their succession in the future. This implies that there is no performance predictability pattern associated with the Saudi mutual funds.

The study concludes that contrary to the general believed, mutual funds in Saudi Arabia, in general, do not seem to provide superior return compared to unmanaged market indices benchmarks or naive buy and hold passive strategy. That is, mutual fund managers, Islamic and conventional, do not tend to have superior investment skills or useful private information. As a result, the Saudi mutual fund managers do not seem to generate sufficient abnormal returns for their investors to offset the associated costs of information and transactions, as well as the management fees charged. In addition, the Sharia screening criteria do not tend to have an adverse impact on the Islamic mutual funds since the managerial investment skills difference between both types of mutual funds is indistinguishable.

The results do not imply that the Saudi mutual fund managers are incompetent or that mutual funds do not offer a financial service. In fact, they provide asset diversification that may not be achieved by individual investing as well as providing administrative services such as book keeping and execute trading on behalf of their investors. The study particularly, helps Saudi mutual fund managers, Islamic and conventional, to identify their performance to develop future investment strategies for the funds under their management. The Saudi mutual funds are advised to reconsider the costs and the benefits of their research, management fees and trading activities. The study also assists regulators and policy makers’ decision in Saudi Arabia by providing much needed insight analysis and understanding with regards to the performance and managerial skills of the Islamic and conventional mutual fund managers in the Saudi market.

For further areas of the research development, the paper also aims to investigate the following (the results are not out yet);
* Try to answer the question that why do Saudi mutual fund managers, Islamic and conventional, do not seem to possess superior management skills to generate abnormal return than the passive buy and hold investment strategy despite the additional fees paid to professional investment managers?.

* To employ a cross sectional analysis to investigate the factors that influence the Saudi mutual funds performance, both Islamic and conventional. Examined factors are management fees, portfolio turnover, age, size, corporate governance, etc.