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November 2016
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Financial
Crisis (The Total
Investment & Insurance Solutions)
Do fund managers consider momentum/contrarian
strategy in their trading? Do these strategies remain constant or are they
dependent on the market conditions? Does financial crisis make them behave
differently? Do fund managers really make good decisions on strategy selection,
to respond market change? To explore these issues, Luyue Jin, Cheng Zhen,
Mengyao Xu, Xiaoyu Wang, Yaolin Wang conducted a study, “Mutual Fund Managers’
Choice of Momentum Strategy- Pre/During/Post Financial Crisis”. They studied
the US data from September 2003 to March 2013 which was divided into three
periods: pre-crisis (September 2003 to September 2007), during the crisis
(October 2007 to February 2009) and post-crisis (March 2009 to March 2013). The Total Investment & Insurance
Solutions
September 2003 is chosen as the starting
point of sample period to exclude any influence from the previous dot-com
crisis. From 2003 March, the stock market moved up until September 2007, when
the market index reached its all-time high. The ending point of the sample
period, March 2013, is the month when the market index went up as high as it
was in September 2007, for the first time after the crisis.
The study involved a total of 207 mutual fund
schemes, selected on three criteria: the offer date before September 2003, the
scheme should be a growth or a value fund and its total net asset should be
higher than $10 million. An alternate way in which the samples were divided was
through their market-capitalisation. Also, UMD (up-minus-down), SML (security
market line), HML (high-minus-low) historical monthly data and historical benchmark
rates, excess market returns and risk-free rates, were collected from Kenneth R
French Data Library. The Total Investment
& Insurance Solutions
The writers of the paper picked all the
schemes and tested each scheme for the whole period to check the significance
of the coefficient of UMD to see whether the fund managers take momentum or
contrarian strategy in their trading. The fund managers were then classified
into three groups, momentum strategy (significantly positive coefficient),
contrarian strategy (significantly negative coefficient) and no momentum (not
significantly different from zero) consideration. The Total Investment & Insurance Solutions
Momentum in a stock is described as the
tendency of the stock price to continue rising or to continue falling, based on
the direction it initially is in. Thus, momentum strategy aims to capitalise
from the continuing trends in the market. Contrarian strategy follows a method
where purchasing and selling is done in contrast to the prevailing market
sentiments. ‘No strategy’ refers to the mutual fund schemes whose managers
didn’t follow either of these two strategies. By comparing the percentage of
each strategy being followed, its popularity is gauged. The Total Investment & Insurance
Solutions
Since the schemes are divided into three
categories on the basis of the strategy, alpha can be estimated for each of the
category and, if there is significant difference in returns by one strategy
from the other two, that particular strategy has some significance. Which
strategy produced the highest alpha under what situation was also determined.
After dividing the mutual funds into various groups and segments, it was found
that fund managers preferred momentum strategy before the financial crisis and
shifted to ‘no strategy’ during crisis and moved to contrarian strategy after
the crisis. The contrarian strategy usually becomes significant in the long
run; thus, there is a fair question whether the fund managers realised this and
adopted it during the financial crisis.
The Total Investment & Insurance Solutions
The paper concluded that the strategies opted
by fund managers are dependent on the market and they shift their strategies
along with the changes in situation. The study explored a combination of 27
different ways by taking three different sub-periods during which the dominant
strategy changed as well. Lastly, the shift in strategy influences a fund’s
performance. Managers, who shifted to no strategy during crisis or to
contrarian strategy after crisis, had an improved performance, to a large
extent. The Total Investment &
Insurance Solutions
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