ABSTRACT
Studies on downside risk timing in asset management utilize both parametric and non-parametric methodology for calculation of Value at Risk (VaR) as a measure of downside risk timing skill. We utilize parametric methodology for calculation of VaR on a robust sample of 36 large cap open-ended equity mutual funds over a ten-year horizon. We sort funds on the basis of 3-year and 5-year ranking and conduct panel data analysis on variables shortlisted to gauge the impact of VaR. Since, Covid 19 pandemic presented an economic shock to the world economy, we break the time period of study into Non-Covid (2011–2019) and During Covid (Dec 2019 onwards). To the best of our knowledge, our study is the first ever study in Indian context to utilize VaR estimates in assessing the ability of fund managers to capitalize on macroeconomic information & generate superior returns by shifting funds between high and low downside risk assets.. Our study leads us to three valuable inferences – One, fund managers have limited array of mechanisms available for timing downside risk – shifting funds between cash & other assets and making transmission between high beta to low beta stocks with equity holdings within constrained interplay as per regulations. Second, funds skilled in downside risk timing attract high fund flows and carry out swift transmission between small-cap and large cap stocks in response to macro-economic information, hence generating superior returns during market uptrends (13–25% on an average) & at least two-times the alpha generated by unskilled downtimers Third, most skilled fund managers’ exhibit persistence in downside risk timing skill across 3-year and 5-year ranking periods, and this continues even during Covid-19 pandemic, an economic shock
