African Journal of Business Management Vol. 6(2), pp. 514-520,18 January, 2012
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.1428
ISSN 1993-8233 ©2012 Academic Journals

Full Length Research Paper

Validity of efficient market hypothesis: Evidence from
UK mutual funds
M. Jibran Sheikh and Umara Noreen*
COMSATS Institute of Information Technology, Islamabad, Pakistan .
Accepted 8 September, 2011

This research is geared towards analysing performance of the fund managers an d their market timing abilities. For the purpose of this study, sample of 50 U.K. mutual funds were selected in random. Their returns from the beginning of 1990 to the end of 2008 were used for hypotheses testing. Financial Times All Share Index was taken as a benchmark. Two widely accepted performance measurement techniques were employed, that is, Jensen alpha measure and Treynor and Mazuy market timing hypothesis. Based on the results, it is concluded that the fund managers lacked the ability to predict the market movement on consistent bases. They were unable to outperform the market or in simple words, they could not “beat the market”. Any chance of outperforming the market is merely a random chance and this cannot be done on consistent bases. An interesting thing to note is that fund managers also lacked market timing abilities which supports the efficient market hypothesis proposed by Fama. Present research has strong implications for existing and potential fund managers and individual investors in term s of measuring the performance of mutual funds.
Key words: Efficient market hypothesis, Jensen alpha, Treynor and Mazuy, gamma measure, market timing ability.
INTRODUCTION
In the last two decades, there has been a substantial growth in empirical stud ies in which academics have examining performance of mutual funds. This includes establishing whether performances of the funds have been predictable over time. U.S Mutual funds have been the main focus of these empirical studies.
Grinblatt and Titman (199 2), Hendricks et al. (1993),
Goetzmann and Ibbotson (1994), Malkiel (1995),
Brown and Goetzmann (1995) Elton et al. (1996) and
Carhart (1997) among many others, have concluded that past performances of mutual funds are very good indicator of their future p erformances. The main reason could be that mutual fund managers employ same investment strategies over and over as suggested by Gruber (1996).
Brown et al. (1999) had examined U.S hedge funds while Christopherson et al. (1998, 1999) and Carhart
(1997) examined the results of U.S pension funds.
There are various rationales for studying the

*Corresponding author. E-mail: umaranoreen@gmail.com.

performance of these funds. Two main reasons are to find out if a mutual fund manager , in general, poses superior skills when it comes to investment. Another is to evaluate the market timing abilities of the fund managers. Carhart (1997) suggests that, almost similar findings with reference to four factor model, as fees of mutual funds, are usually dependent upon the size of assets under the control of the fund. Gruber
(1996) suggests that funds with good and consistent past performance achieve higher growth rate as they receive higher revenues in terms of fees. This notion is also backed by Sirri and Tufano (1998).
Fama (1972) further explained and described the components of investment performance. Merton
(1972) came up with mutual fund theorem and explained that for a given portfolio, the efficient frontier portfolio provides the highest expected r eturns based upon given standard deviation.
In the analysis of fund managers‟ ability, after theoretical studies proposed by significant researchers, the empirical studies have been tested for the performance of mutual fund, such as Chen et al.
(1987), Lehman and Modest (1987), Cumby and Glen

Sheikh and Noreen

(1990), Malkiel (1995) and Chen and Knez