Does Indian Mutual Fund Manager Turnover have an Impact on Fund Performance?

Abstract

There has been a wide range of research which shows that active portfolio managers cannot produce alpha. But, if we look into the results of these studies closely, they are derived from the fund data and not on the individual fund manager’s performance. This means that computing an alpha with a 10 years data based on weekly or monthly returns, say for an active fund such as HDFC Mid-cap opportunities fund, makes us to believe most of the times that the excess returns generated by the fund are both economically and statistically not different from zero or in fact negative. Hence, any investment made in a passive investment fund such as HDFC Index Fund would have generated a better return than the active fund. From the above discussion, we may conclude without any doubt that the fund manager responsible for active fund did not exhibit superior investment skills. However, over the same 10-year period, the fund would have had different managers managing the fund at different points of time. It would not be appropriate to conclude that not even one fund manager is skilful out of the several managers who managed the fund as this is an average performance of all the fund managers. But, on the face of it, this drives us to believe that no fund manager has the investment skills and is not worth paying for the skill. Alternatively, we can also argue that there are some managers with skill, but they may switch to different funds more frequently due to better pay packages and corporate positions at other fund houses. This results in a situation where the fund house loses the skill of the manager along with the manager.