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)

**A performance evaluation of portfolio managers: tests of micro and macro forecasting
**

SIMON STEVENSON∗

Department of Banking and Finance, Graduate School of Business, University College Dublin, Blackrock, County Dublin, Ireland

This study examines the performance of Irish domiciled funds over the period 1988 to 2000. The study speciﬁcally examines whether Irish portfolio managers, particularly in light of the small and thinly traded domestic market, can effectively partake in micro or macro forecasting. Four alternative models are used to jointly assess micro and macro forecasting, while a ﬁfth non-parametric model is used to solely examine market timing effects. The results reveal consistent evidence of poor micro forecasting/stock selection ability across the funds examined. The macro forecasting results are more varied, with some evidence of positive timing ability in two of the models. In addition, signiﬁcant correlations are generally found between the funds micro and macro forecasting ability, while diagnostic tests reveal limited evidence of mis-speciﬁcation in the models used. Keywords: Ireland, portfolio managers, micro/macro forecasting, models, market timing

1.

INTRODUCTION

The examination of the performance of funds has attracted a large degree of attention in the ﬁnancial economics literature over the past 30 years. The primary aim of this literature has been to examine whether portfolio fund managers are able to consistently outperform the market, thereby violating one of the principles of the Efﬁcient Markets Hypothesis. This study examines the micro and macro forecasting ability of Irish domiciled fund managers. In the context of this analysis micro forecasting (stock selectivity) refers to the ability of fund managers to choose individual assets, while macro forecasting (market timing) refers to the manager’s ability to correctly assess market movements and to respond accordingly in terms of the assets held. A total of 35 pension funds are analysed on a monthly basis over the period 1988 to 2000, using a variety of alternative techniques. Initially the conventional performance measures of Sharpe (1964), Treynor and Mazuy (1996) and Jensen (1968, 1969, 1972) are analysed, while ﬁve alternative models are used to assess the stock selection and market timing ability of fund managers. The ﬁrst two are the variations of the quadratic model as

∗ Tel.: 353-1-716-8848; Fax: 353-1-283-5482; E-mail: simon.stevenson@ucd.ie/ stevenss@blackrock.ucd.ie.

The European Journal of Finance ISSN 1351-847X print/ISSN 1466-4364 online © 2004 Taylor & Francis Ltd http://www.tandf.co.uk/journals DOI: 10.1080/1351847032000143413

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proposed by Chen and Stockum (1986) and Bhattacharya and Pﬂeiderer (1983). Two alternative speciﬁcations of the Henriksson and Merton (1981) parametric model, or dual-beta model, are also analysed. Finally, the Henriksson and Merton non-parametric model, which does not rely on a Capital Asset Pricing Model (CAPM) framework is also used. The majority of existing empirical studies that have examined the issue of micro and macro forecasting have largely analysed larger capital markets such as the USA and the UK. This study, by looking at a small and thinly traded market, should allow comparisons to be drawn on any differences in the performance of fund managers based on markets of differing sizes and liquidity. The small nature of the Dublin Stock Exchange leads to fund managers having a limited universe of domestic investment opportunities, in particular due to the limited number of large actively traded stocks. In addition, the Irish market is heavily concentrated in a small number of industries. This is even more apparent when the actively traded stocks are examined. With a small number of exceptions the large actively traded stocks are heavily concentrated in the ﬁnancial services and food industries. These problems have not been aided in recent years by a growing tendency, particularly in the hi-tech sector, for ﬁrms to by-pass the Irish market and list directly on exchanges such as NASDAQ. This has severe implications for portfolio managers in terms of both stock selection ability and the ability to effectively shift allocations to take advantage of market timing movements. The small number of actively traded stocks inevitably leads to relatively large holdings in these companies and limited opportunities to alter allocations quickly and in a large-scale manner. Existing studies examining timing and selectivity have often found inconclusive results. Kon (1983) examined 37 US mutual funds between 1960 and 1976, ﬁnding that individual funds exhibited positive timing ability and performance. However, the study did conclude that the results were not inconsistent with the efﬁcient markets null hypothesis. This would indicate that managers as a group do not have special information regarding unanticipated market movements. A large number of studies of US mutual funds have found that a negative relationship is present between a manager’s micro and macro forecasting ability. Such studies include Kon (1983), Lehman and Modest (1987), Grinblatt and Titman (1989), Cumby and Glen (1990), Connor and Korajczyk (1991) and Coggin and Hunter (1993). Henriksson (1984) empirically tested 116 mutual funds over the period 1968 to 1980 using both the Henriksson and Merton parametric and non-parametric models. Only three of the funds displayed positive market timing ability at statistically signiﬁcant levels in the parametric tests, while the non-parametric tests were also doubtful as to the timing ability of funds. Chang and Lewellen (1984) also used the Henriksson and Merton parametric model, ﬁnding nominal evidence of either micro or macro forecasting ability, with mutual funds generally unable to outperform a passive strategy. Lee and Rahman (1990) is one of the few studies to have found evidence of positive timing ability from the USA. In this case signiﬁcant positive ﬁndings were reported for 16 of the 93 funds analysed. Studies to have examined non-US markets are relatively few in number. However, the empirical ﬁndings have been broadly similar to US results. Fletcher (1995) examined UK unit trusts over the period 1980 to 1989, with the ﬁndings showing

Performance evaluation of portfolio managers in Ireland

393

positive selection ability and negative timing ability. Koh et al. (1993) use both the parametric and non-parametric Henriksson and Merton models on Singapore funds. The initial results show that the null hypothesis of no timing ability can be rejected at the 99% level for both up and down market forecasts for the nonparametric model. These ﬁndings are consistent over the whole sample period and the four sub-periods tested. The parametric results however, ﬁnd no signiﬁcant evidence of macro forecasting ability. The authors argue that the true level of market timing ability can be suppressed due to fund managers selecting stocks with low systematic risk. Hallahan and Faff (1999) examine Australian equity trusts over the period 1988 to 1997. The authors ﬁnd limited evidence of timing ability across the alternative models adopted. However, in contrast to many previous studies this is not compensated for by strong micro forecasting ability. Previous work on the Irish market is relatively limited. Kenneally and Gallagher (1992) examine the performance of the unit linked fund sector using a variety of performance measures to rank the funds over the period 1983 to 1990. The measures used include the conventional Sharpe, Treynor and Jensen measures as well as the period weighting measure developed by Grinblatt and Titman (1989). Overall the results are fairly conclusive in that the funds underperformed the Irish market. Stevenson (1998) examines 24 Irish domiciled funds using the parametric and non-parametric Henriksson and Merton models. The results reveal that all 24 funds display evidence of selection ability, with 20 displaying such ability at statistically signiﬁcant levels. In addition, ﬁve funds display positive market timing ability. The non-parametric tests also provide evidence of macro forecasting ability. Debate has also centred in recent studies on the speciﬁcation of the selectivity and market timing models used. Studies such as Ferson and Schadt (1996) argue that misspeciﬁcation may help to explain the generally poor market timing results obtained in previous empirical work. In part due to the potential problem of misspeciﬁcation a number of studies have extended the empirical analysis into a multiple portfolio benchmark framework, for example, Lehman and Modest (1987), Connor and Korajczyk (1991) and Elton et al. (1995). This study approaches the issue of misspeciﬁcation using the approach proposed by Jaganathan and Korajczyk (1986) and tested in studies such as Hallahan and Faff (1999). The remainder of the paper is set out as follows. The following section provides details of the data set of Irish funds used and reports the initial summary statistics and performance measures. The third section details the methodological framework adopted in the testing of micro and macro forecasting ability in a CAPM framework, while Section 4 presents the corresponding empirical results, including the speciﬁcation tests. Section 5 presents the ﬁndings from the Henriksson and Merton non-parametric model. The ﬁnal section provides concluding comments.

2.

DATA AND SUMMARY STATISTICS

The data used in this paper consists of 35 equity pension funds obtained from the Software Vineyard MoneyMate database. The data is available on a monthly

394

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basis over the period January 1988 to December 2000. As such funds in Ireland are issued through ﬁnancial institutions problems concerning survivorship bias, as discussed in studies such as Brown et al. (1995), Hendricks et al. (1997) and Blake and Timmerman (1998), are not an issue in the current study. All of the funds analysed are primarily concentrated in the Irish equity sector, with the ISEQ Index used as the benchmark throughout the study. All returns are tested on an excess basis with the interbank rate used as the risk-free rate. While the ﬁnal sample consists of 35 funds, this ﬁgure was reduced from a larger number of funds for whom continuous data was available over the sample period. The elimination of funds was due to a number of factors speciﬁcally relating to the fund market in Ireland. The ﬁrst issue relates to the practice of different funds being based on the same assets. Rather than issue new units of a speciﬁc fund, institutions tend to launch a new fund based on the same assets. While returns may differ slightly due to differing management charges, the funds are effectively the same. Where it was evident from the dataset that such duplication occurred, only when one fund was included in the analysis. A second issue relates to the regulatory framework in place and the fact that funds are not required by regulation to hold minimum allocations in their stated sector. Funds were therefore checked to ensure that throughout the sample period they all held relatively large allocations in the Irish equity sector, due to the use of the ISEQ Index as the benchmark throughout the study. The 35 funds were all selected from the Aggressively Managed, Managed Growth, General Equity and Irish Equity sectors. However, due to the limited funds in some of these sectors it was not possible to examine whether there were any signiﬁcant differences in performance between funds in different categories. Table 1 reports the summary statistics of the funds in question and the initial performance evaluation measures. The three measures initially presented are the Sharpe, Treynor and Jensen. The Sharpe and Treynor measures provide a means of obtaining a relative risk-adjusted ranking of performance, the two measures differing in their choice of risk measure. The Sharpe ratio uses the standard deviation of the funds, while the Treynor ratio uses the beta of the fund relative to the benchmark index. The third measure is the Jensen alpha. This measure is based on the mean-variance framework of the CAPM and the parametric market timing and selectivity models used later in this paper are based on this measure. The Jensen measure is taken as the intercept in (1), which is a general expression of the CAPM/Market Model: Rit = αi + βi Rmt + εt (1)

where Rit is the excess return of the fund and Rmt is the excess return of the benchmark index. As the expected value of the error term in (1) is equal to zero, the intercept can be taken to be a measure of the portfolio manager’s selection ability. It should, however, be noted that the Jensen measure can provide biased results. Studies such as Fama (1972), Jensen (1972), Grant (1977), Admati and Ross (1985) and Dybvig and Ross (1985) note that biased ﬁndings will be obtained in the presence of market timing ability on the part of the fund manager. This is therefore the rationale behind the use of the later models analysed in this study which explicitly separate a manager’s micro and macro forecasting ability. In addition, if

**Performance evaluation of portfolio managers in Ireland
**

Table 1. Summary statistics of funds Mean Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Fund 17 Fund 18 Fund 19 Fund 20 Fund 21 Fund 22 Fund 23 Fund 24 Fund 25 Fund 26 Fund 27 Fund 28 Fund 29 Fund 30 Fund 31 Fund 32 Fund 33 Fund 34 Fund 35 0.3754 0.4743 0.6698 0.4451 0.4434 0.5549 0.5707 0.4404 0.4089 0.4413 0.4015 0.4278 0.3550 0.4576 0.4799 0.3207 0.3704 0.4002 0.7486 0.4541 0.5854 0.4223 0.1488 0.6635 0.5571 0.3906 0.2456 0.4200 0.4099 0.4700 0.4278 0.3951 0.4924 0.3903 0.4302 Standard deviation 4.3587 4.4815 4.2787 4.2291 4.5660 4.7243 5.0118 3.0012 3.1587 2.9983 3.3317 3.3861 3.1377 2.8755 5.6354 3.2333 3.2846 3.4693 12.5852 4.4304 4.7185 5.8251 5.6233 4.9999 5.2432 3.2172 3.4576 3.9033 3.1559 3.3288 3.3861 3.1195 6.1380 3.2401 3.4725 Sharpe ratio −0.0571 −0.0334 0.0107 −0.0423 −0.0396 −0.0146 −0.0106 −0.0612 −0.0681 −0.0610 −0.0668 −0.0579 −0.0858 −0.0579 −0.0256 −0.0938 −0.0772 −0.0645 0.0099 −0.0384 −0.0082 −0.0346 −0.0845 0.0079 −0.0128 −0.0726 −0.1095 −0.0523 −0.0679 −0.0463 −0.0579 −0.0734 −0.0215 −0.0721 −0.0558 Rank 18 10 1 14 13 7 5 23 27 22 25 21 33 19 9 34 31 24 2 12 4 11 32 3 6 29 35 16 26 15 20 30 8 28 17 Treynor ratio −0.5150 −0.2272 0.0720 −0.2619 −0.3123 −0.0907 −0.0631 −0.5086 −0.4783 −0.5063 −0.4282 −0.3990 −0.5472 −0.4358 −0.2904 −0.6627 −0.6202 −0.4109 0.1586 −0.2629 −0.0508 −0.2157 −0.6746 0.0464 −0.0748 −0.4849 −0.7416 −0.3896 −0.4764 −0.3009 −0.3990 −0.4669 −0.2687 −0.5098 −0.3554 Rank 30 9 2 10 15 7 5 28 25 27 21 19 31 22 13 33 32 20 1 11 4 8 34 3 6 26 35 17 24 14 18 23 12 29 16 Jensen alpha −0.4977∗ −0.4877∗∗ −0.2800 −0.5286∗∗∗ −0.4778∗ −0.4588∗∗∗ −0.4853∗∗∗ −0.3702∗ −0.4471∗∗∗ −0.3692∗∗ −0.4899∗∗∗ −0.4497∗∗∗ −0.5220∗∗∗ −0.3638∗∗ −0.3994 −0.5392∗∗∗ −0.4650∗∗ −0.5035∗∗∗ −0.2766 −0.5015∗∗ −0.4277∗∗ −0.6783∗∗∗ −0.8381∗∗ −0.3944∗∗∗ −0.5240∗∗∗ −0.4813∗∗∗ −0.6404∗∗∗ −0.4733∗∗ −0.4460∗∗∗ −0.4176∗∗∗ −0.4497∗∗∗ −0.4813∗∗∗ −0.3837 −0.4700∗∗∗ −0.4737∗∗∗

395

Rank 26 24 2 31 20 15 23 5 12 4 25 13 29 3 8 32 16 28 1 27 10 34 35 7 30 22 33 18 11 9 13 21 6 17 19

Notes: Table 1 reports the mean monthly performance and standard deviation of the 35 funds over the entire sample period. In addition, the table also reports the Sharpe, Treynor and Jensen performance measures over the sample period and ranks each fund’s performance. For the Jensen measure, ∗ indicates signiﬁcance at a 10% level, ∗∗ at a 5% level and ∗∗∗ at a 1% level.

the benchmark index used is inefﬁcient, then a fund or portfolio that is efﬁcient relative to it will produce a positive Jensen measure (Dybvig and Ross, 1985). Therefore, while negative intercepts provide an indication of negative selection ability, positive alphas cannot be viewed in the same manner.1

1

Grinblatt and Titman (1989) propose a method of estimating the alpha in a manner that overcomes this bias. The class of measures, known as Period Weighting Measures, deﬁne the alpha in terms of

396

S. Stevenson

The three primary performance measures show that in the vast majority of cases the funds underperform the benchmark. With regard to both the Sharpe and Treynor measures, 32 of the 35 funds had negative ratios, indicating underperformance, while in the case of the Jensen alpha all 35 had negative intercepts, with 31 of them being statistically signiﬁcant at conventional levels. The initial performance measures therefore indicate mass underperformance of Irish domiciled funds against a domestic benchmark index. Spearman rank correlation coefﬁcients were estimated across the three measures. In each case the coefﬁcient was positive and statistically different from zero at conventional levels. The rankings for the Sharpe and Treynor measures had a correlation 0f 0.9456, which was signiﬁcant at a 99% level. The two correlations with regard to the Jensen alpha were lower, with a coefﬁcient of 0.383 with the Sharpe, signiﬁcant at a 95% level, and 0.2896, signiﬁcant at a 90% level, with regard to the Treynor.

3.

3.1

METHODOLOGICAL FRAMEWORK

Chen and Stockum quadratic model

Two alternative quadratic models are used in this study, that proposed by Chen and Stockum (1986) and that developed by Bhattacharya and Pﬂeiderer (1983). The original quadratic model was proposed by Treynor and Mazuy (1966), who added a quadratic term to (1) to allow for market timing ability, and can be represented as follows:

2 Rit = αi + βi Rmt + γi Rmt + εt

(2)

Chen and Stockum (1986) extend the pure random coefﬁcient model developed by Hildreth and Houck (1968) and the variable mean response model of Singh et al. (1976). The authors propose that βi can be speciﬁed using (3) if fund betas are adjusted following forecasts and current market performance is an unbiased estimate of future performance. ¯ βi = βi + λi Rmt + µt (3) ¯ Equation 3 decomposes the systematic risk into a target beta (βi ) which represents the beta in the absence of market timing, the effect of market timing (λi Rmt ) and an error term. The authors argue that the portfolio beta may change in the absence of market timing due to the different responses of high and low beta assets. The random error term allows the portfolios beta to alter due to non-systematic factors. ¯ If the funds beta is not non-stationary then βi = βi , with (3) reverting to (1). If the fund manager does engage in market timing then the variability of the error term should not be statistically different from zero and λi should be statistically signiﬁcant, with its sign indicating whether the manager has been successful in

a weighted return. The measure restricts the measure to positive weights. The rationale behind this is that the weights will be negative for large values of the market benchmark. If the manager has timing ability then the return of the fund will be high when the benchmark is large on average. This will result in negative weights making a negative alpha possible. In the case of the current study no negative weights were found, therefore, the Grinblatt and Titman alpha is identical to that originally estimated. The full details on these tests are available from the author.

Performance evaluation of portfolio managers in Ireland

397

their timing decisions. If λi is not signiﬁcant and the variability of the error term is not equal to zero, then the model descends to that of Francis and Fabbozi’s (1980) pure random coefﬁcient market model. If this is so, then changes in the beta of the fund can be stated to be caused by non-market related factors. However, if both the coefﬁcient and the error term are statistically signiﬁcant, then a varying parameter model should be utilised as the non-stationarity of the funds beta is caused by both market timing and random behaviour. The authors substitute (3) into (1) to provide the following speciﬁcation.

2 ¯ Rit = αi + βi Rmt + λi Rmt + it

(4)

where it = εit + µit Rit . The Chen and Stockum (1986) model is therefore essentially a modiﬁed version of the standard quadratic model proposed by Treynor and Mazuy (1966).

3.2 Bhattacharya and Pﬂeiderer quadratic model

The second model based on the quadratic speciﬁcation is that proposed by Bhattacharya and Pﬂeiderer (1983), who extend the work of Jensen (1972). This measure assesses the timing ability of a fund through the manager’s ability to forecast the deviation of the market portfolio from its consensus expected return. This is deﬁned as the correlation coefﬁcient between the manager’s forecast and the excess return on the market. Bhattacharya and Pﬂeiderer (1983) deﬁne this coefﬁcient as follows: σ2 ψ = 2 π 2 = ρ2 (5) σπ + σε

2 2 where σε is the variance of the manager’s forecast error and σπ is the variance of 2 can be estimated directly from the returns of the market excess return. While σπ 2 the benchmark excess returns it is necessary to estimate σε . This is achieved by initially deﬁning the quadratic form as follows: ˜ ˜ ˜ (6) Rit = η + η Rm + n (Rmt )2 + ˜ 0 1 2 t

Bhattacharya and Pﬂeiderer (1983) then show that the quadratic model can be further deﬁned as: ˜ ˜ ˜ ˜ ˜ ˜ (7) Rit = αi + θE(Rm )(1 − ψ)Rmt + ψθ(Rmt )2 + θ ψ εt Rmt + µit The intercept terms remain the measure of the manager’s micro forecasting ability. The manager’s response to information is represented by θ , while ψ is the coefﬁcient of determination between the manager’s forecast and the excess return on the market. The manager’s timing ability can be found by examining the disturbance term in the above speciﬁcation. The error term can be deﬁned as shown in (8), and is modelled with (9). ˜ ˜ ˜ (8) ˜ = θψ εt Rmt + µit

t 2 ˜ ( ˜ t )2 = θ 2 ψ 2 σε (Rmt )2 + ξt where: ˜ ε ˜ ˜ ˜ ξt = θ 2 ψ 2 (Rmt )2 (˜ 2 − σ 2 ) + (µit )2 + 2θ ψRmt εt µit T ε

(9) (10)

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S. Stevenson

As previously discussed, the timing ability is deﬁned as the correlation between the manager’s forecasts and the excess return on the market. The variance of the manager’s forecast error can be recovered as (9) produces a constant esti2 2 mator of θ 2 ψ 2 σε . If we recover the estimator ψθ from (7) we can estimate σε . This then allows the estimation of ρ as shown in (5). In many earlier studies which utilised the Bhattacharya and Pﬂeiderer (1983) model, the sign of ρ was ignored with the absolute value used. This study, however, follows the approach taken by Jaganathan and Korajczyk (1986), Coggin and Hunter (1993) and Coggin et al. (1993) in allowing negative market timing. Where the sign of the coefﬁcient η2 in (6) is negative it is assumed that this is an indication of poor timing ability.

3.3 Henriksson and Merton parametric model

The third parametric model utilized in this study is that proposed by Henriksson and Merton (1981). Their parametric model, often referred to as a dual-beta model, complies with the assumptions of the CAPM and multifactor models, such as those of Merton (1973) and Ross (1976), and as with the quadratic models, aims to provide a means of overcoming potential bias in the measure of selectivity. Merton (1981) provides theoretical support for the model, with the concept that investment managers will either forecast that the market will outperform the riskless asset, or that the riskless asset will outperform the market. The model proposed by Henriksson and Merton (1981) can be expressed as follows: Rit = αi + β1i Rmt + β2i [Dt (Rmt )] + εit (11)

The dummy variable takes the value of zero when the market return is greater than that of the risk-free asset, and −1 when the risk-free asset’s return exceeds that of the benchmark. Henriksson (1984) proposes a modiﬁed version that takes into account potential problems with the return generating process. Speciﬁcally, problems may arise due to both the omission of relevant factors and issues concerning the choice of the benchmark portfolio. Henriksson (1984) therefore adds a second factor based on the excess return of an equally weighted portfolio of the funds analysed. The modiﬁed model can be expressed as follows: Rit = αi + β1i Rmt + β2i [D1t (Rmt )] + β3i [Rewt − βew (Rmt )] + β4i (D1t [Rewt − βew (Rmt )]) + εit (12) where Rewt is the excess return on the equally weighted fund portfolio, βew is the beta of this portfolio relative to the benchmark index. The fourth expression takes the value of max[0, w(t)] where w(t) equals the third expression. The dummy variable takes the value of zero when the return on the equally weighted portfolio exceeds that of the riskless assets and the −1 if the reverse occurs.

3.4 Correcting for heteroscedasticity

All three parametric models require correction for heteroscedasticity. Chen and Stockum (1986) note that the error term in their speciﬁcation is equal to εit + µit Rit . The Henriksson and Merton (1981) model also requires correction as the error term is an increasing function of Rmt . Both of these models are corrected using the methods of Hansen (1982) and White (1980). The Bhattacharya and

Performance evaluation of portfolio managers in Ireland

399

Pﬂeiderer (1983) speciﬁcation is adjusted using the Generalized Least Squares procedure utilized by Lee and Rahman (1990) and Coggin et al. (1993). Initially the variance of the error terms in (6) and (9) are calculated:

2 ˜ 2 σ 2 = θ 2 ψ 2 σε (Rmt )2 + σµ 2 4 4 2 ˜ ˜ σξ = 2θ 4 ψ 4 (Rmt )4 σε + 2σµ + 4θ 2 ψ 2 (Rmt )2 σµ

(13) (14)

2 2 2 In order to obtain predictions of σ 2 and σξ , estimates of σµ and σε are required. 2 2 The estimated value of σε is obtained by using (6), while σµ can be predicted using 2 (1). The variables in (6) and (9) are then divided by σ 2 and σξ , and re-estimated using Ordinary Least Squares.

4.

EMPIRICAL EVIDENCE ON MICRO AND MACRO FORECASTING

The empirical results for the models based on a CAPM framework are presented as such. Table 2 provides summary results across the four alternative models, while Tables 3 and 4 provide full details of the results across the 35 funds. The results are relatively consistent across the alternative models and in relation to the original Jensen ﬁgures. In each case substantial evidence is found concerning poor stock selection/micro forecasting ability. Indeed across the four models and the original Jensen ﬁgures there is only one case where a fund obtains a signiﬁcant positive intercept, this being Fund 3 (Hibernian (Ind) H-R Equity) when the adapted Henriksson and Merton model is used. This model is also the only case in which the majority of the intercepts, whether signiﬁcant or not, are positive, with an average intercept of 0.0165. For the original Jensen ﬁgures and both of the alternative quadratic based models all 35 intercepts are negative, with 31 signiﬁcantly so in the original market model speciﬁcation, 25 in the case of the quadratic model and 29 for the Bhattacharya and Pﬂeiderer (1983) model. It is noticeable that in line with expectations, the downward bias of the Jensen measure is reduced in both of the quadratic models, with a reduction in the average intercept value and the number of signiﬁcant negative alphas. These general patterns are continued with the two variations on the Henriksson and Merton parametric dual-beta model. The average value of the intercept for the original Henriksson and Merton model is again lower than in the original Jensen tests, −0.4516 in comparison to −0.4712, while the number of signiﬁcant negative coefﬁcients is also far lower with only 12 being signiﬁcant at conventional levels. The adapted Henriksson and Merton model provides the most differences in the assessment of micro forecasting, with a positive average intercept, and only 16 of the 35 funds having negative alphas. In addition, in only four of these cases is the intercept signiﬁcantly negative, while, as previously stated, Fund 3 has a signiﬁcantly positive alpha. The results obtained with reference to selectivity are in marked contrast to Stevenson (1998). This study examined 24 Irish funds over the period 1992 to 1997. The results showed that 12 of the funds displayed signiﬁcant positive intercepts, while all 24 had positive intercepts. The betas in each case, both in terms of the funds and the different empirical models, are relatively stable. However, the betas estimated are relatively low, with

400

Table 2. Summary parametric selectivity and market timing results Pension Average Jensen α α −0.4712 −0.4540 Min −0.8381 −0.8885 0.3605 −0.0071 Max −0.2766 −0.1154 0.9405 0.0191 −0.0064 0.9890 0.0145 1.2250 0.8460 0.7266 1.0099 0.6269 1.5619 0.9074 No. positive 0 0 35 12 0 12 1 35 7 19 35 12 35 23 No. negative 35 35 0 23 35 23 34 0 28 16 0 23 0 12

S. Stevenson

No. signiﬁcant 31 25 35 0 29 24 12 35 0 5 35 3 35 5

Quadratic β 0.5792 γ −0.0005

Bhattacharya and Pﬂeiderer α −0.1050 −0.2345 ρ −0.0074 −0.3668 Henriksson and Merton α −0.4516 −2.0923 0.5747 0.3224 β1 −0.0169 −0.2424 β2 Henriksson and Merton Adapted α 0.0165 −1.0421 0.5762 0.3445 β1 β2 0.0054 −0.2381 β3 1.0584 0.6545 0.0325 −0.7885 β4

Notes: Table 2 provides summary statistics for the parametric micro and macro forecasting models. In each case the intercept term can be interpreted as the measure of micro forecasting/stock selectivity. The respective measures of market timing or macro forecasting are γ for the quadratic model, are ρ for the adapted quadratic model of Bhattacharya and Pﬂeiderer and β2 for the two dual-beta models of Henriksson and Merton (1981).The table provides details of the average coefﬁcient, the minimum and maximum values, the number of coefﬁcients that are positive and negative and the number of coefﬁcients that are signiﬁcant at 10% levels or less.

average ﬁgures ranging from 0.5747 to 0.5792. Indeed, only Fund 19, in the case of the quadratic and the original dual-beta model, is estimated to have a beta in excess of unity. The low level of systematic risk across the funds is in line with a number of previous studies, for example, Hallahan and Faff (1999), who ﬁnd only four funds out of 65 to have betas greater than unity. It should also be noted that the low level of systematic risk present in the data may limit the perceived market timing ability of the funds, as the low fund beta will have resulted from the selection of assets with low systematic risk (Koh et al., 1993). The market timing/macro forecasting results do not compensate for the poor stock selection ability reported. Each of the four models reveal that the majority of the funds having negative timing coefﬁcients, and that with the exception of the adapted Henriksson and Merton model, the average timing coefﬁcient is negative in each case. For the original Henriksson and Merton model only 12 of the funds have positive coefﬁcients, however, none are statistically signiﬁcant, while in the remaining three cases only 12 of the funds have positive coefﬁcients. In the case of the quadratic and dual-beta models none of the funds have signiﬁcant coefﬁcients, however, some signiﬁcant ﬁndings are reported for the Bhattacharya

**Performance evaluation of portfolio managers in Ireland
**

Table 3. Chen and Stockum results Chen and Stockum model α Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Fund 17 Fund 18 Fund 19 Fund 20 Fund 21 Fund 22 Fund 23 Fund 24 Fund 25 Fund 26 Fund 27 Fund 28 Fund 29 Fund 30 Fund 31 Fund 32 Fund 33 Fund 34 Fund 35 −0.2702 −0.3222 −0.1154 −0.4818∗∗∗ −0.3175 −0.4717∗∗ −0.5000∗∗∗ −0.2726 −0.3347∗ −0.2713 −0.4587∗∗∗ −0.2745 −0.4765∗∗∗ −0.3277∗ −0.7399∗ −0.4719∗∗∗ −0.3501∗ −0.5118∗∗∗ −0.8885 −0.4130∗ −0.4394∗∗ −0.7538∗∗∗ −0.8809∗∗ −0.3905∗∗∗ −0.5908∗∗∗ −0.4321∗∗∗ −0.6452∗∗∗ −0.4060∗ −0.3333∗ −0.3760∗∗ −0.2745 −0.4397∗∗∗ −0.7690 −0.4064** −0.4824∗∗∗ β 0.4757∗∗∗ 0.6541∗∗∗ 0.6302∗∗∗ 0.6840∗∗∗ 0.5742∗∗∗ 0.7661∗∗∗ 0.8493∗∗∗ 0.3607∗∗∗ 0.4489∗∗∗ 0.3605∗∗∗ 0.5233∗∗∗ 0.4876∗∗∗ 0.4942∗∗∗ 0.3854∗∗∗ 0.5213∗∗∗ 0.4592∗∗∗ 0.4082∗∗∗ 0.5497∗∗∗ 0.8238∗∗∗ 0.6460∗∗∗ 0.7649∗∗∗ 0.9405∗∗∗ 0.7152∗∗∗ 0.8519∗∗∗ 0.9017∗∗∗ 0.4830∗∗∗ 0.5147∗∗∗ 0.5248∗∗∗ 0.4487∗∗∗ 0.5152∗∗∗ 0.4876∗∗∗ 0.4931∗∗∗ 0.5176∗∗∗ 0.4602∗∗∗ 0.5502∗∗∗ γ −0.0071 −0.0052 −0.0051 −0.0015 −0.0050 0.0004 0.0005 −0.0031 −0.0035 −0.0031 −0.0010 −0.0055 −0.0014 −0.0011 0.0106 −0.0021 −0.0036 0.0003 0.0191 −0.0028 0.0004 0.0024 0.0013 −0.0001 0.0021 −0.0015 0.0001 −0.0021 −0.0035 −0.0013 −0.0055 −0.0013 0.0120 −0.0020 0.0003

401

Bhattacharya and Pﬂeiderer model α −0.0237 −0.0508 −0.0208 −0.1472∗∗∗ −0.0311 −0.1123∗∗ −0.1771∗∗∗ −0.0566 −0.0954∗ −0.0565 −0.1793∗∗∗ −0.0745 −0.2173∗∗∗ −0.0907∗ −0.0314∗ −0.1244∗∗∗ −0.0647 −0.1898 −0.0064 −0.0638∗ −0.1052∗∗ −0.1112∗∗∗ −0.0555∗∗ −0.1554∗∗∗ −0.2345∗∗∗ −0.1439∗∗∗ −0.1716∗∗∗ −0.0619∗ −0.0953∗ −0.1354∗∗ −0.0745 −0.2074∗∗∗ −0.0260 −0.1064∗∗ −0.1786∗∗∗ ρ −0.1459∗ −0.2548∗∗∗ −0.3087∗∗∗ −0.0772 −0.3668∗∗∗ 0.0204 0.0207 −0.1968∗∗ −0.1387∗ −0.1970∗∗ −0.0454 −0.2052∗∗ −0.0598 −0.0469 0.7244∗∗∗ −0.0973 −0.2027∗∗ 0.0099 0.9890∗∗∗ −0.1547∗ 0.0186 0.1411∗ 0.1597∗∗ −0.0051 0.0898 −0.0706 0.0076 −0.1480∗ −0.1387∗ −0.0616 −0.2052∗∗ −0.0543 0.8240∗∗∗ −0.0938 0.0105

Notes: Table 3 reports the full results from the two alternative speciﬁcations of the quadratic model. The 2 Chen and Stockum (1986) model can be displayed as: Rit = αi + βi Rmt + γi Rmt + εt . The intercept term is the measure of micro forecasting, while γ is the measure of macro forecasting ability. The model is corrected for heteroscedasticity using the methods of Hansen (1982) and White (1980). The Bhattacharya and 2 Pﬂeiderer (1983) adapted quadratic model can be displayed as: Rit = αi + βi Rmt + γi Rmt + εt , with the intercept term as the measure of micro forecasting. The measure of macro forecasting is taken as the correlation between the managers forecasts and the excess return on the market. The correlation is calculated as follows: 2 2 2 2 2 ψ = σπ /(σπ + σε ) = ρ 2 , where σε is the variance of the managers forecast error and σπ is the variance of the market excess return. The sign of the correlation coefﬁcient is determined by the sign of γ in the initial OLS model. The OLS estimation is corrected for heteroscedasticity using the Generalised Least Squares procedure utilised by Lee and Rahman (1990) and Coggin et al.(1993). ∗ Indicates signiﬁcance at a 10% level, ∗∗ at a 5% level and ∗∗∗ at a 1% level.

402

Table 4. Henriksson and Merton parametric results Adapted speciﬁcation β2 α 0.3445∗∗∗ β1 β2 β3 1.1181∗∗∗ β4

Original speciﬁcation β1 0.3723∗∗∗ 0.5621∗∗∗ 0.5689∗∗∗ 0.6662∗∗∗ 0.5123∗∗∗ 0.7673∗∗∗ 0.8466∗∗∗ 0.3228∗∗∗ 0.3933∗∗∗ 0.3224∗∗∗ 0.5147∗∗∗ 0.4230∗∗∗ 0.4793∗∗∗ 0.3651∗∗∗ 0.7160∗∗∗ 0.4205∗∗∗ 0.3622∗∗∗ 0.5448∗∗∗ 1.2250∗∗∗ 0.5971∗∗∗ 0.7266 0.4538 0.5026∗∗ 0.0141 0.4681 −0.0505 −0.3688∗ 0.1104 0.2015 0.1076 0.0052 0.3082 −0.0788 0.1830 −0.1225 −0.0487 0.1961 −0.1458 0.4015 0.1449 0.5733∗∗∗ 0.5755∗∗∗ 0.6540∗∗∗ 0.5187∗∗∗ 0.7747∗∗∗ 0.8705∗∗∗ 0.3515∗∗∗ 0.4082∗∗∗ 0.3517∗∗∗ 0.5037∗∗∗ 0.4265∗∗∗ 0.4736∗∗∗ 0.3640∗∗∗ 0.6448∗∗ 0.4495∗∗∗ 0.3766∗∗∗ 0.5520∗∗∗ 1.0099∗∗∗ 0.6259∗∗∗

α

Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Fund 17 Fund 18 Fund 19 Fund 20

−0.1252 −0.0652 0.0145 −0.4434 −0.1817 −0.4671∗ −0.4777∗∗ −0.1892 −0.1887 −0.1875 −0.4465∗∗ −0.1388 −0.4491∗∗∗ −0.2705 −1.2910 −0.3620 −0.2460 −0.4852∗∗ −2.0923 −0.2769

−0.2260 −0.1969 −0.1372 −0.0397 −0.1379 0.0039 −0.0036 −0.0843 −0.1204 −0.0847 −0.0202 −0.1449 −0.0340 −0.0435 0.4154 −0.0825 −0.1020 −0.0086 0.8460 −0.1047

−0.2381 −0.1602 −0.1086 0.0399 −0.1034 0.0307 0.0356 −0.0307 −0.0834 −0.0304 −0.0189 −0.1225* −0.0281 −0.0275 0.3561 −0.0279 −0.0638 −0.0151 0.6269 −0.0461

1.3633∗∗∗ 1.2072∗∗∗ 0.7857∗∗∗ 1.5619∗∗∗ 1.0617∗∗∗ 0.6896∗∗∗ 1.2036∗∗∗ 1.1452∗∗∗ 1.2041∗∗∗ 0.7951∗∗∗ 1.0564∗∗∗ 0.7132∗∗∗ 0.9857∗∗∗ 1.2533∗∗∗ 1.2396∗∗∗ 1.2505∗∗∗ 0.8873∗∗∗ 1.4879∗∗∗ 1.4772∗∗∗

−0.3106 0.0894 0.0443 −0.1424 0.0347 0.0545 0.2334 0.2730 0.1311 0.2789∗ −0.1303 0.0144 −0.0742 −0.0313 −0.7643 0.2755∗ 0.1236 0.0563 −0.2622 0.2689

S. Stevenson

Performance evaluation of portfolio managers in Ireland

Fund 21 Fund 22 Fund 23 Fund 24 Fund 25 Fund 26 Fund 27 Fund 28 Fund 29 Fund 30 Fund 31 Fund 32 Fund 33 Fund 34 Fund 35 0.0038 −0.0427 0.0333 −0.0476 0.0548 −0.0681 −0.2424 −0.0022 −0.1207 −0.0520 −0.1449 −0.0296 0.4502 −0.0682 −0.0083 0.0308 0.0136 0.1606 0.0276 0.1148∗ −0.0559 −0.0252 −0.1208 −0.0832 −0.0220 −0.1225* −0.0235 0.3881 −0.0949 0.0152

−0.4359 −0.5868∗ −0.9097∗ −0.2923 −0.6416∗∗∗ −0.3352 −0.5884∗∗ −0.4685 −0.1868 −0.3051 −0.1388 −0.4178∗∗ −1.3501 −0.3236 −0.4559∗∗ −0.0194 −0.5528 −1.0421∗∗ −0.3605∗ −0.7081∗∗∗ 0.0633 −0.1334 0.1400 0.1987 0.0353 0.3082 −0.0541 −0.1664 −0.0230 −0.1161

0.7662∗∗∗ 0.9140∗∗∗ 0.7299∗∗∗ 0.8275∗∗∗ 0.9261∗∗∗ 0.4517∗∗∗ 0.5019∗∗∗ 0.5276∗∗∗ 0.3929∗∗∗ 0.4907∗∗∗ 0.4230∗∗∗ 0.4803∗∗∗ 0.7276∗∗∗ 0.4287∗∗∗ 0.5454∗∗∗ 0.7736∗∗∗ 0.9515∗∗∗ 0.8201∗∗∗ 0.8806∗∗∗ 0.9687∗∗∗ 0.4495∗∗∗ 0.4892∗∗∗ 0.5049∗∗∗ 0.4084∗∗∗ 0.5022∗∗∗ 0.4265∗∗∗ 0.4749∗∗∗ 0.6541∗∗ 0.4607∗∗∗ 0.5524∗∗∗ 1.0635∗∗∗ 0.7790∗∗∗ 1.4019∗∗∗ 0.8465∗∗∗ 0.6545∗∗∗ 0.8421∗∗∗ 0.7708∗∗∗ 0.9220∗∗∗ 1.1457∗∗∗ 0.9731∗∗∗ 1.0562∗∗∗ 0.7045∗∗∗ 1.2430∗∗∗ 1.2699∗∗∗ 0.8858∗∗∗

0.0555 0.3725 0.9074 0.5335∗∗∗ 0.4294∗∗ −0.0401 −0.1473 −0.2548 0.1371 0.0995 0.0142 −0.7066 −0.7885 0.3070∗∗ 0.0549

Notes: Table 4 reports the full results from the Henriksson and Merton (1981) dual-beta model. The original speciﬁcation of the model can be displayed as: Rit = αi + β1i Rmt + β2i [Dt (Rmt )] + εit . The dummy variable takes the value of zero when the market return is greater than that of the risk-free asset, and −1 when the risk-free asset’s return exceeds that of the benchmark. The intercept term is the measure of micro forecasting, while β2 is the measures of macro forecasting ability. The adapted speciﬁcation can be displayed as Rit = αi + β1i Rmt + β2i [D1t (Rmt )] + β3i [Rewt − βew (Rmt )] + β4i (D1t [Rewt − βew (Rmt )]) + εit . The ﬁrst dummy variable takes the value of zero when the market return is greater than that of the risk-free asset, and −1 when the risk-free asset’s return exceeds that of the benchmark. Rewt is the excess return on the equally weighted fund portfolio, βew is the beta of this portfolio relative to the benchmark index. The fourth expression takes the value of max[0, w (t )] where w (t ) equals the third expression. The dummy variable takes the value of zero when the return on the equally weighted portfolio exceeds that of the riskless assets and −1 if the reverse occurs. The intercept term is the measure of micro forecasting, while β2 is the measures of macro forecasting ability. Both models are corrected for heteroscedasticity using the methods of Hansen (1982) and White (1980). ∗ Indicates signiﬁcance at a 10% level, ∗∗ at a 5% level and ∗∗∗ at a 1% level.

403

404

S. Stevenson

and Pﬂeiderer (1983) and the adapted Henriksson and Merton model. In the case of the Bhattacharya and Pﬂeiderer (1983) model 18 of the funds had signiﬁcant timing coefﬁcients, four being positive and the remaining being negative. As stated in the previous section due to the manner in which the timing coefﬁcient is estimated the sign of the coefﬁcient is taken as the sign of the squared term in the initial quadratic equation. For the adapted dual-beta model three of the coefﬁcients are signiﬁcant, one in a positive manner indicating superior timing ability and two in a negative fashion. A number of previous studies have found evidence that the results for market timing and selection ability tend to be negatively correlated.2 With the exception of the Bhattacharya and Pﬂeiderer (1983) results each of the coefﬁcients are negative and signiﬁcant at conventional levels. For both the Chen and Stockum (1986) and the original speciﬁcation of the dual-beta model the results are signiﬁcant at a 99% level, with coefﬁcients of −0.826 and −0.941, respectively. For the adapted dual-beta the coefﬁcient is lower, at −0.335, but is still signiﬁcant at conventional levels. For the Bhattacharya and Pﬂeiderer (1983) the reported coefﬁcient is 0.16 and is not signiﬁcantly different from zero. These results are interesting in that a negative relationship is still found despite the generally negative ﬁndings for both micro and macro forecasting ability evident in the results reported. Reasons proposed as to the rationale behind this negative relationship include the misspeciﬁcation of the return generating model, negatively correlated sampling errors (Coggin et al., 1993), a misspeciﬁed benchmark portfolio (Henriksson, 1984) and non-linearities in the return generating model (Jaganathan and Korajczyk, 1986). The three primary OLS based models are also tested for speciﬁcation errors, using the approach proposed by Jaganathan and Korajczyk (1986) and utilized in studies such as Hallahan and Faff (1999). The quadratic model, together with the two alternative Henriksson and Merton (1981) models, are augmented with the additional of the excess market return to a higher order than that already included. Therefore, the quadratic model is augmented by the inclusion of a cubed term, while squared terms are added to the two Henriksson and Merton (1981) models. Therefore, (2), (11) and (12) can be re-written as follows:

2 3 Rit = αi + βi Rmt + γi Rmt + δi Rmt + εt 2 Rit = αi + β1i Rmt + β2i [Dt (Rmt )] + γi Rmt εit

(15) (16)

**Rit = αi + β1i Rmt + β2i [D1t (Rmt )] + β3i [Rewt − βew (Rmt )]
**

2 + β4i (D1t [Rewt − βew (Rmt )]) + γi Rmt + εit

(17)

In each case the coefﬁcient referring to the additional variable should not be signiﬁcant if the timing model is appropriate. The results, reported in Tables 5–7, reveal a limited degree of misspeciﬁcation. In the case of the quadratic and the adapted dual beta models, the inclusion of the additional term results in only ﬁve signiﬁcant coefﬁcients, while for the original Henriksson and Merton model no signiﬁcant ﬁndings are reported. The number of signiﬁcant cases is markedly below

2 See, for example, Kon (1983), Lehman and Modest (1987), Grinblatt and Titman (1989), Cumby and Glen (1990), Connor and Korajczyk (1991) and Coggin and Hunter (1993).

**Performance evaluation of portfolio managers in Ireland
**

Table 5. Quadratic model results with cubed term α Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Fund 17 Fund 18 Fund 19 Fund 20 Fund 21 Fund 22 Fund 23 Fund 24 Fund 25 Fund 26 Fund 27 Fund 28 Fund 29 Fund 30 Fund 31 Fund 32 Fund 33 Fund 34 Fund 35 −0.2031 −0.3088 −0.0767 −0.4423∗∗∗ −0.2898 −0.4381∗∗ −0.4982∗∗∗ −0.2501 −0.2990∗ −0.2489 −0.4224∗∗∗ −0.2383 −0.4325∗∗∗ −0.2639 −0.8411∗ −0.4078∗∗ −0.3036 −0.4697∗∗∗ −1.0741 −0.3482 −0.4061∗∗ −0.6798∗∗∗ −0.8779∗∗ −0.3823∗∗∗ −0.5695∗∗∗ −0.3616∗∗ −0.5589∗∗∗ −0.3842∗ −0.2978∗ −0.3343∗∗ −0.2384 −0.3984∗∗∗ −0.8766 −0.3436∗∗ −0.4400∗∗∗ β 0.5266∗∗∗ 0.6642∗∗∗ 0.6596∗∗∗ 0.7140∗∗∗ 0.5952∗∗∗ 0.7916∗∗∗ 0.8507∗∗∗ 0.3778∗∗∗ 0.4760∗∗∗ 0.3774∗∗∗ 0.5508∗∗∗ 0.5150∗∗∗ 0.5275∗∗∗ 0.4338∗∗∗ 0.4446∗∗∗ 0.5079∗∗∗ 0.4435∗∗∗ 0.5816∗∗∗ 0.6830∗∗∗ 0.6951∗∗∗ 0.7902∗∗∗ 0.9967∗∗∗ 0.7175∗∗∗ 0.8582∗∗∗ 0.9178∗∗∗ 0.5374∗∗∗ 0.5802∗∗∗ 0.5414∗∗∗ 0.4756∗∗∗ 0.5468∗∗∗ 0.5150∗∗∗ 0.5245∗∗∗ 0.4359∗∗∗ 0.5078∗∗∗ 0.5824∗∗∗ γ −0.0106 −0.0059 −0.0072∗∗ −0.0035 −0.0065 −0.0014 0.0004 −0.0042 −0.0054 −0.0042 −0.0029 −0.0074 −0.0037∗∗ −0.0045 0.0159 −0.0055∗ −0.0060 −0.0019 0.0289 −0.0062 −0.0014 −0.0015 0.0012 −0.0006 0.0010 −0.0052∗ −0.0044 −0.0032 −0.0054 −0.0035∗ −0.0074∗ −0.0035∗ 0.0177 −0.0053∗ −0.0019 δ

405

−0.0004 −0.0001 −0.0002 −0.0022 −0.0002 −0.0002 0.0000 −0.0001 −0.0002 −0.0001 −0.0002 −0.0002 −0.0002∗∗ −0.0004 0.0006 −0.0004∗∗ −0.0003 −0.0002 0.0011 −0.0004 −0.0002 −0.0004 −0.0002 0.0000 −0.0001 −0.0004∗∗∗ −0.0005∗∗∗ −0.0001 −0.0002 −0.0002∗ −0.0002 −0.0002 0.0006 −0.0004 −0.0002

Notes: Table 5 provides details of the speciﬁcation tests for the Chen and Stockum (1986) quadratic model. The 2 3 initial model is augmented by the inclusion of a cubed term as follows: Rit = αi + βi Rmt + γi Rmt + δi Rmt + εt . A signiﬁcant δ coefﬁcient would indicate misspeciﬁcation. The model is corrected for heteroscedasticity using the methods of Hansen (1982) and White (1980). ∗ Indicates signiﬁcance at a 10% level, ∗∗ at a 5% level and ∗∗∗ at a 1% level.

previous studies to have examined the speciﬁcation of market timing models. Hallahan and Faff (1999), for example, ﬁnd signiﬁcant coefﬁcients in 15 of the 65 Australian funds they examined with the quadratic model.3

3

Meta analysis tests were also run on the results. Meta analysis allows an examination of whether the variation in timing and selectivity across funds is real or artiﬁcial. The results, which are available from the author, show that with the exception of the timing coefﬁcients in the dual-beta model, the chi-squared statistics are not signiﬁcant at conventional levels. This indicates that for the quadratic

406

Table 6. Henriksson and Merton parametric results with squared term α Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Fund 17 Fund 18 Fund 19 Fund 20 Fund 21 Fund 22 Fund 23 Fund 24 Fund 25 Fund 26 Fund 27 Fund 28 Fund 29 Fund 30 Fund 31 Fund 32 Fund 33 Fund 34 Fund 35 −0.1917 −0.0407 −0.2415 −0.5128∗ −0.4105 −0.4139 −0.3789 −0.3268 −0.2356 −0.3252 −0.5229∗∗ −0.4174 −0.5393∗∗∗ −0.2626 −1.3916 −0.3400 −0.3950 −0.3984∗ −2.7501 −0.2668 −0.3891 0.0368 −0.8316 −0.0857 −0.5332∗∗ −0.2824 −0.4455 −0.8312∗∗ −0.2339 −0.2876 −0.4175 −0.5066∗∗ −1.3694 −0.3494 −0.3675 β1 0.4472∗∗ 0.5518∗∗∗ 0.6760∗∗∗ 0.6952∗∗∗ 0.6080∗∗∗ 0.7451∗∗∗ 0.8053∗∗∗ 0.3804∗∗∗ 0.4129∗∗∗ 0.3800∗∗∗ 0.5466∗∗∗ 0.5395∗∗∗ 0.5170∗∗∗ 0.3617∗∗∗ 0.7581∗∗ 0.4113∗∗∗ 0.4245∗∗∗ 0.5085∗∗∗ 1.5001∗∗∗ 0.5929∗∗∗ 0.7466∗∗∗ 0.6533∗∗∗ 0.6973∗∗∗ 0.7412∗∗∗ 0.8807∗∗∗ 0.4296∗∗∗ 0.4422∗∗∗ 0.6793∗∗∗ 0.4126∗∗∗ 0.4831∗∗∗ 0.5395∗∗∗ 0.5174∗∗∗ 0.7357∗∗ 0.4395∗∗∗ 0.5085∗∗∗ β2 −0.0612 −0.2195 0.0983 0.0241 0.0725 −0.0450 −0.0944 0.0422 −0.0772 0.0420 0.0501 0.1115 0.0490 −0.0508 0.5080 −0.1028 0.0350 −0.0884 1.4510 −0.1139 −0.0392 −0.6163∗∗ −0.0385 −0.2376∗ −0.0449 −0.1167 −0.1556 0.3314 −0.0775 −0.0689 0.1115 0.0521 0.4680 −0.0444 −0.0896

S. Stevenson

γ −0.0055 0.0007 −0.0078 −0.0021 −0.0070 0.0016 0.0030 −0.0043 −0.0014 −0.0042 −0.0023 −0.0085 −0.0275 0.0002 −0.0031 0.0007 −0.0045 0.0026 −0.0200 0.0003 0.0014 0.0190 0.0024 0.0063 0.0033 0.0016 0.0044 −0.0111 −0.0014 0.0006 −0.0085 −0.0027 −0.0006 −0.0008 0.0027

Notes: Table 6 provides details of the speciﬁcation tests for the Henriksson and Merton (1981) dual-beta model. The initial model is augmented by the inclusion of a squared term as follows: Rit = αi + β1i Rmt + 2 β2i [Dt (Rmt )] + γi Rmt εit . A signiﬁcant γ coefﬁcient would indicate misspeciﬁcation. The model is corrected for heteroscedasticity using the methods of Hansen (1982) and White (1980). ∗ Indicates signiﬁcance at a 10% level, ∗∗ at a 5% level and ∗∗∗ at a 1% level.

model and for the selection ability coefﬁcient for the dual-beta model there is no real variation around the mean. In contrast, the signiﬁcant results obtained for the dual-beta timing coefﬁcients indicate that there is real variation around the mean in excess of that attributable to sampling error. These ﬁndings, particularly in relation to the micro forecasting results also further conﬁrm the ﬁndings previously reported. The lack of real variation around the negative mean values and the number of signiﬁcantly negative intercepts, provides further evidence as to the poor selection ability of Irish domiciled fund managers.

**Performance evaluation of portfolio managers in Ireland
**

Table 7. Henriksson and Merton adapted parametric results with squared term α Fund 1 Fund 2 Fund 3 Fund 4 Fund 5 Fund 6 Fund 7 Fund 8 Fund 9 Fund 10 Fund 11 Fund 12 Fund 13 Fund 14 Fund 15 Fund 16 Fund 17 Fund 18 Fund 19 Fund 20 Fund 21 Fund 22 Fund 23 Fund 24 Fund 25 Fund 26 Fund 27 Fund 28 Fund 29 Fund 30 Fund 31 Fund 32 Fund 33 Fund 34 Fund 35 0.6067 0.5251∗∗ 0.2735 −0.0167 0.2827 0.0425 0.2574 −0.0129 0.1847 −0.0163 −0.0337 0.0518 −0.1404 0.2325 −0.1142 −0.0012 0.0756 −0.0240 −0.0426 0.1896 0.0668 0.1079 −0.9837∗ −0.1546 −0.6049∗∗ 0.1557 0.0612 −0.1875 0.1813 0.0840 0.0519 −0.1150 −0.6981 0.0278 0.0075 β1 0.3930∗∗∗ 0.5445∗∗∗ 0.6681∗∗∗ 0.6665∗∗∗ 0.5936∗∗∗ 0.7371∗∗∗ 0.8255∗∗∗ 0.4013∗∗∗ 0.4150∗∗∗ 0.4017∗∗∗ 0.5194∗∗∗ 0.5300∗∗∗ 0.4984∗∗∗ 0.3440∗∗∗ 0.6414∗∗∗ 0.4303∗∗∗ 0.4253∗∗∗ 0.5027∗∗∗ 1.1893∗∗∗ 0.6079∗∗∗ 0.7388∗∗∗ 0.6846∗∗∗ 0.7965∗∗∗ 0.7974∗∗∗ 0.9270∗∗∗ 0.4122∗∗∗ 0.4106∗∗∗ 0.6371∗∗∗ 0.4154∗∗∗ 0.4826∗∗∗ 0.5300∗∗∗ 0.4994∗∗∗ 0.6151∗∗ 0.4627∗∗∗ 0.5025∗∗∗ β2 −0.1325 −0.2230 0.0931 −0.0128 0.0599 −0.0512 −0.0625 0.0779 −0.6869 0.0787 0.0154 0.1032 0.0262 −0.0711 0.3488 −0.0698 0.0423 −0.0922 1.0179 −0.0854 −0.0451 −0.5681∗∗ 0.1092 −0.1537 0.0240 −0.1373 −0.1966 0.2763∗ −0.0678 −0.0648 0.1032 0.0301 0.3032 −0.0052 −0.0936 β3 1.1222∗∗∗ 1.3608∗∗∗ 1.2151∗∗∗ 0.7868∗∗∗ 1.5684∗∗∗ 1.0585∗∗∗ 0.6858∗∗∗ 1.2078∗∗∗ 1.1458∗∗∗ 1.2084∗∗∗ 0.7964∗∗∗ 1.0653∗∗∗ 0.7153∗∗∗ 0.9840∗∗∗ 1.2530∗∗∗ 1.2380∗∗∗ 1.2547∗∗∗ 0.8831∗∗∗ 1.5034∗∗∗ 1.4756∗∗∗ 1.0605∗∗∗ 0.7560∗∗∗ 1.3998∗∗∗ 0.8393∗∗∗ 0.6509∗∗∗ 0.8389∗∗∗ 0.7640∗∗∗ 0.9334∗∗∗ 1.1463∗∗∗ 0.9714∗∗∗ 1.0651∗∗∗ 0.7066∗∗∗ 1.2396∗∗∗ 1.2700∗∗∗ 0.8815∗∗∗ β4 −0.3005 0.0834 0.0635 −0.1398 0.0503 0.0466 0.2240 0.2834∗ 0.1325 0.2893∗ −0.1271 0.0360 −0.0691 −0.0354 −0.7650 0.2715∗ 0.1337 0.0460 −2.2248 0.2651 0.0483 0.3169 0.9025 0.5162∗∗∗ 0.4207∗∗ −0.0479 −0.1636 −0.2273 0.1385 0.0954 0.0357 −0.0655 −0.7966 0.3074∗∗ 0.0445 γ

407

−0.0035 0.0021 −0.0066∗ −0.0009 −0.0053 0.0027 0.0032 −0.0036 −0.0005 −0.0026 −0.0011 −0.0739∗ −0.0018 0.0014 0.0002 0.0014 −0.0035 0.0035 −0.0128 0.0013 0.0025 0.0190 0.0017 0.0059 0.0030 0.0027 0.0056∗ −0.0094∗∗ −0.0005 0.0014 −0.0074∗ −0.0018 0.0028 −0.0001 0.0036

Notes: Table 7 provides details of the speciﬁcation tests for the Henriksson (1984) modiﬁed dual-beta model. The initial model is augmented by the inclusion of a squared term as follows: Rit = αi + β1i Rmt + β2i [D1t (Rmt )] + β3i [Rewt − βew (Rmt )]

2 + β4i (D1t [Rewt − βew (Rmt )]) + γi Rmt + εit

A signiﬁcant γ coefﬁcient indicates misspeciﬁcation. The model is corrected for heteroscedasticity using the methods of Hansen (1982) and White (1980). ∗ Indicates signiﬁcance at a 10% level, ∗∗ at a 5% level and ∗∗∗ at a 1% level.

5.

NON-PARAMETRIC MODEL

The ﬁnal model examined in this study is the non-parametric model proposed by Henriksson and Merton (1981), which allows the investigation of market timing

408

Table 8. Henriksson and Merton non-parametric results Actual returns rmt ≤ rft Predicted returns rmt ≤ rft rmt > rft Totals Prob n1 ≥ 535 Prob n2 ≥ 1057 535 626 1161 0.0000 0.0000 rmt > rft 708 1057 1765

S. Stevenson

Notes: Table 14 reports the ﬁndings from the Henriksson and Merton (1981) non-parametric model. Under the null hypothesis, n1 , the number of correct forecasts that rmt ≤ rft , follows a hypergeometric distribution. The non-parametric model requires a proxy for the forecasts, this study uses the change in the allocation of the fund between the risk-free asset and equities.

ability without the need to assume a CAPM framework. The model allows for the fact that while the conditional probabilities of a correct forecast can measure forecasting ability, they are not reliant on the return distributions. If rmt is the return of the benchmark index over a period starting at point t, and rft is the corresponding risk-free rate, then if a manager predicts that rmt ≤ rft the probability of success is p1 (t). The probability of failure can be deﬁned as 1 − p2 (t). p1 (t) can also be viewed as the probability of the prediction conditional on the actual outcome of rmt ≤ rft . Therefore, the forecast can only be of positive value if the probability of success is greater than the probability of failure. Therefore, it can be stated that the null hypothesis of no market timing ability can be formulated as: p1 (1) + p2 (1) = 1 (18) Under the null hypothesis, n1 , the number of correct forecasts that rmt ≤ rft , follows a hypergeometric distribution. The non-parametric model does however require a proxy for the forecasts. This study uses the approach adopted in papers such as Koh et al. (1993) and uses the change in the allocation of the fund. This paper measures the change in the allocation split between the risk-free asset and equities. The results, reported in Table 8 reveal that for both up and down market forecasts the null hypothesis of no market timing or macro forecasting ability is rejected at the 99% level. These results indicate that fund managers do have timing ability, in contrast to some of the parametric results reported earlier.

6.

CONCLUSIONS

This study has aimed to examine the forecasting ability of Irish domiciled fund managers. The small scale of the Irish market presents challenges for portfolio managers due to both the small number of large cap ﬁrms and the thin trading of smaller stocks. These factors, together with issues such as the growing trend for

Performance evaluation of portfolio managers in Ireland

409

international quotations and the industrial concentration of the Irish market, limit fund managers’ opportunities domestically and therefore, their potential ability to outperform the market. The analysis examines a variety of micro and macro forecasting models, ﬁnding consistent evidence that ﬁrms do not have positive micro forecasting, or stock selection, ability. These ﬁndings would be consistent with the problems encountered in managing funds in a small market. The market timing results are less consistent and do provide some evidence of macro forecasting ability. While a number of the parametric models fail to ﬁnd evidence of timing ability, there is some evidence from the Bhattacharya and Pﬂeiderer (1983) model and Henriksson and Merton’s (1981) non-parametric model. In addition, for the remaining models little evidence is found of signiﬁcant negative timing ability, while for three of the four parametric models a signiﬁcant negative correlation is reported for between the measures of micro and macro forecasting.

APPENDIX

Table A1. Funds Sample Pension funds Lifetime/BIAM (Ind) Pen Opportunity Canada Life (Ind) Setanta Pension Equity Hibernian (Ind) H-R Equity Irish Life (Ind) Exempt Equity 2 Progressive (Ind) PP Equity Standard (Ind) Pension Equity Friends (Ind) Individual Irish Equity Canada Life (Ind) BIAM MM Pension Managed Canada Life (Ind) BIAM Pension Managed Canada Life (Ind) Setanta MM Pension Managed Friends (Ind) Individual Managed Hibernian (Ind) H-R Managed Irish Life (Ind) Exempt Managed 1 Lifetime/BIAM (Ind) Pen Growth New Irl (Ind) PP Managed Progressive (Ind) Grobond Pension Progressive (Ind) PP Managed Standard (Ind) Pension Managed New Irl (Grp) Pension Equity 1 Progressive (Grp) Exempt Equity Standard (Grp) Group Equity AIB (Grp) Irish Equity AIB (Grp) Small Companies Friends (Grp) Irish Equity Irish Life (Grp) Pension Irish Equity AIB (Grp) Managed BIAM (Grp)/BOI Pension Fund UT Canada Life (Grp) Seanta Group Pension Managed Canada Life (Grp) Setanta Pension Managed (Continued )

410

Table A1. Continued Friends (Grp) Mixed Hibernian (Grp) GMP Managed Irish Life (Grp) Pension Managed 1 New Irl (Grp) Pension Managed 1 Progressive (Grp) Exempt Managed Standard (Grp) Group Managed

S. Stevenson

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