Time-varying effects of diversification moderated by market conditions on mutual fund performance in the ASEAN market: Thailand, Malaysia, and Singapore

• Main Authors: Elbinias, Jose Miguel, Oposa, Jaime Agustin, Pulido, Giana Francesca, Cuartero, Rene D.
• Format: text
• Published: Animo Repository 2021
• Subjects: Portfolio management—Southeast Asia; Mutual funds—Southeast Asia; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/9468
• Institution: De La Salle University

Markowitz’ modern portfolio theory posits that diversification is a key financial strategy to produce consistent maximum returns in financial securities such as mutual funds. However, recent literature suggest that this consistent maximum returns could not be generated due to the complex nature of markets, and as such, diversification has a time-varying effect. It is also believed that these time-varying effects is largely moderated by market conditions. Our study samples 3 ASEAN mutual fund markets (Thailand, Malaysia and Singapore) from 2010-2019, covering equity funds. Our results show using a stochastic frontiers analysis that across all levels of market maturity, we consistently find that there is time-varying effect of diversification on fund performance. We find that the number of stocks held (or higher degrees of diversification) lead to more efficient returns. Further analysis using a panel regression showed that market conditions do not have significant moderating effect on the impact of diversification to mutual funds at an individual country. However, this changes when integration is assumed across markets where the signs of a crisis and higher levels of market volatility become significant in moderating the effect of diversification on fund performance.