Mutual Fund Performance, Performance Persistence and Impact of Unprecedented Factors on Mutual Fund Performance in Saudi Arabia

Abstract

This empirical study comprehensively analyses the performance of active and passive equity mutual funds in Saudi Arabia during 2010–2020. This analysis also encompasses subsample periods coinciding with various significant market events (SMEs), such as the periods before and after the financial reforms of 2015, the Saudi Arabian market-specific financial crises in 2014–2016 and 2019–2020, and bullish and bearish market conditions. Furthermore, it explores whether mutual fund risk-adjusted performance varies when using different benchmark indices. In addition, this study examines whether the performance persistence of individual active funds is linked to genuine stock-picking skills or is merely a result of pure luck. Moreover, given the extreme participation of individual traders in the Saudi Arabian market, the study examines whether investor sentiment influences mutual fund performance, along with other factors, such as oil price volatility, compliance with Islamic law, management expense ratios, fund flows, fund age and fund size. Last, it measures the impact of the spread of the coronavirus disease (COVID-19), including the increase in confirmed new cases and confirmed fatalities, on mutual fund performance during the peak of the pandemic in Saudi Arabia. The study applied various econometric models to examine the proposed hypotheses. First, the mean-difference measure was used to calculate the benchmark-adjusted performance, while time-series regression-based models (specifically, the Jensen single-factor model and the Fama–French–Carhart 6-factor model) were applied to estimate the risk-adjusted performance. Further, structural break tests were used to examine significant variations in fund performance across SMEs and to compare the performance of both active and passive mutual funds. Second, a bootstrap statistical technique was employed to investigate whether the performance persistence of individual active funds can be significantly attributed to genuine stock-picking skills or was merely the result of luck. Last, a panel regression model was used to examine both the potential impact of investor sentiment and the impact of COVID-19 spread on mutual fund performance. The findings regarding the benchmark-adjusted and risk-adjusted performance indicate that active funds outperformed the benchmark indices. However, there is no evidence to support the outperformance of passive funds to these indices. Moreover, structural break tests demonstrated a significant superior performance of active funds over passive funds. In addition, the empirical evidence revealed that the performance of mutual funds during periods of SMEs differed significantly from that in the overall sample period. Regarding the investigation of performance persistence, the study’s findings confirm that genuine stock-picking skills underlie the observed performance persistence across a large number of active funds. Turning to the investigation of the potential influence of investor sentiment on fund performance, the findings suggest a positive and significant impact of investor sentiment on active mutual fund performance. In contrast, the impact of investor sentiment on passive fund performance is comparatively subdued. Last, the study finds that the proliferation of the COVID-19 pandemic exerted a significant and negative impact on the performance of active mutual funds.