Effect of Portfolio Turnover on Fund Performance: Evidence from Pakistan Shariah-compliant Equity Funds

Abstract

The current study aimed to examine the effect of portfolio turnover on the performance of Shariah-compliant equity funds of Pakistan. On the basis of literature, five additional explanatory variables were included specifically expense ratio, age, size, risk, and fund flow. Panel data regression was applied on the data of 10 Shariah-compliant equity funds of Pakistan for the time period July 2014 to June 2018. Panel data regression model was selected on the basis of two sequential tests namely Hausman test and fixed effects test. The results indicated a significant positive relationship between fund performance and portfolio turnover, which served as evidence to articulate portfolio turnover as a rewarding activity. Moreover, results showed significant positive relationships of fund performance with risk and fund flow, indicating that fund performance improves by making high risk investments and attracting large fund flow. This study is distinctive as it endeavored to examine the turnover-performance relationship in respect of Shariah-compliant equity funds of Pakistan. Furthermore, the study considered only Shariah-compliant equity funds; consequently, this relationship may be studied in future for other types of mutual funds of Pakistan.