Mutual fund performance in changing economic conditions: Evidence from an emerging economy

Traditional measures of assessment of mutual fund performance (alpha) are based mostly on Capital Assets Pricing Model which presupposes fixed sensitivity of risk exposure of a fund to its market proxy (beta). However, changing economic conditions will alter this relationship. In conditional performance evaluation, the betas as well as alphas are allowed to vary in response to changing economic conditions over time. We hypothesize that true skill in fund management goes beyond altering the portfolio in response to changes in macroeconomic indicators. Therefore, this study examines the existence of superior performance of open-ended equity mutual funds in India in a conditional setting. We use a survivorship-bias-free database including all schemes since inception (2006-2015). We find evidence of selectivity and timing skills by the Indian fund managers even after controlling for changing macroeconomic variables. The evidence is weaker on aggregate basis than at fund level.