American Journal of Scientific Research ISSN 2301-2005 Issue 67 (2012), pp. 59-75 © EuroJournals Publishing, Inc. 2012 http://www.eurojournals.com/ajsr.htm "Myth of Abnormal Returns: Evidence from UK’s Mutual Funds” M. Jibran Sheikh COMSATS Institute of Information Technology, Islamabad, Pakistan E-mail: Jibransheikh@comsats.edu.pk Nabila Nazir COMSATS Institute of Information Technology, Islamabad, Pakistan E-mail: Nabila@comsats.edu.pk Waheed Iqbal COMSATS Institute of Information Technology, Islamabad, Pakistan E-mail: Waheed.iqbal@comsats.edu.pk Abstract This study employs all major widely-used performance measurement techniques to assess the fund managers’ forecasting skills using a sample data of 50 U.K. mutual funds selected on random bases. Their returns from t 01/1990 to 31/2008 were used for hypotheses testing. While Financial Times All Share Index and London T-Bills monthly rates were taken as a benchmark. However, regression techniques forwarded by Jensen (1968) and Treynor & Mazuy (1966) based on CAPM framework are applied along with Appraisal Ratio,Treynor’s Ratio, Sharpe Measure, Sharpe Alt. Ratio, Modigliani & Mod. Measure and Fama Decomposition to further validate our findings. Our study found that only 20% of mutual fund managers possessed stock picking abilities. These results were based upon Treynor & Mazuy (1966) regression estimates. Our results were consistent with those of Kon (1983) and Henriksson (1984) with respect to b1and b3 regression estimates, i.e. negative correlation existed between trade-off (stock selection) and market timing abilities of managers. These findings suggest that, on average, mutual funds produced 0.81% less returns than FT All share index annually. Keywords: Efficient market hypothesis, Jensen Alpha, Treynor & Mazuy, Gamma measure, market timing ability. I. Introduction THE proposition of efficient market hypothesis plays a vital role in maintaining the security prices a continuous equilibrium level and any departure from this equilibrium will create the possibility to produce abnormal returns. Therefore, if the stock prices are in ‘equilibrium’ it is not possible to outperform the market by choosing the undervalued stocks or even to predict the future market movements so that changing the composition (risk) of the portfolio could generate superior returns. The exponential growth in numbers of mutual funds and their significant role in global stock markets have raised concerns about the fundamental continuous equilibrium state of efficient market theory.