EFFICIENCY OF ASSET ALLOCATION AND MUTUAL FUND RETURNS IN THE INDONESIAN CAPITAL MARKET: PANEL DATA ANALYSIS

Abstract

The mutual fund industry in Indonesia has experienced significant growth over the last two decades, with assets under management reaching Rp 2.18 trillion at the end of 2023, an increase of 18.7 percent compared to the previous year. This study aims to analyze the efficiency of asset allocation and mutual fund returns in the Indonesian capital market using rigorous panel data analysis methodology. The research sample consists of 45 mutual funds registered with the Financial Services Authority (OJK) during 2018-2023, generating a total of 270 panel data observations. The study applies panel regression models with two main approaches, namely Fixed Effect Model (FEM) and Random Effect Model (REM), complemented by dynamic panel analysis using Arellano-Bond GMM to capture lag effects and validate the robustness of the results. The dependent variable in this study is mutual fund return measured as the annual change in Net Asset Value, while the main independent variable is asset allocation efficiency measured using the Herfindahl-Hirschman Index (HHI), with control variables including portfolio composition, liquidity level, investment manager experience, mutual fund age, fund size, and portfolio turnover. Fixed Effect Model estimation results show that asset allocation efficiency has a very significant positive effect on mutual fund returns, with a coefficient of -0.8467 (t-statistic = -4.236, p<0.001), indicating that the more efficient the asset allocation conducted by investment managers, the higher the returns that can be generated. Portfolio composition is also proven to have a significant effect with a coefficient of 0.6234 (t-statistic = 3.412, p<0.001), showing that higher equity allocation results in higher returns in accordance with the risk-return tradeoff. Investment manager experience makes a significant positive contribution with a coefficient of 0.0234 (p<0.01), while liquidity level has a negative effect with a coefficient of -0.2345 (p<0.05), indicating the opportunity cost of excessive cash holdings. The model explains 68.47 percent of the variation in mutual fund returns (Adjusted R² = 0.6847), and estimation results are robust against various alternative specifications and diagnostic tests. The Hausman Test confirms that the Fixed Effect Model is a more appropriate choice compared to the Random Effect Model (χ² = 18.234, p = 0.0031). Dynamic panel analysis using Arellano-Bond GMM yields consistent findings, with significant lagged return (coefficient = 0.2834, p<0.05) indicating persistence in mutual fund returns.