Overconfidence, Excessive Trading, and Fund Performance in Pakistani Open-End Equity Mutual Funds: An Exploratory Analysis of Market State Effects

Purpose: This study examines portfolio turnover — a behavioural proxy for fund-manager overconfidence — and its association with risk-adjusted performance in Pakistani open-end equity mutual funds, and whether this association varies with market state (bull versus bear). Design/Methodology/Approach: Using a complete panel of 13 conventional and Islamic open-end equity funds over 2019–2023 (65 fund-year observations), pooled OLS regressions with heteroscedasticity-robust (HC3) standard errors are estimated. Findings: Three findings emerge. Portfolio turnover is negatively associated with annual return and Sharpe ratio across all specifications, consistent with overconfidence theory, though not statistically significant at this sample size. Market state strongly predicts outcomes: funds underperform by about 29 percentage points in annual return (p = .001) and 1.11 Sharpe-ratio units (p < .001) in bear versus bull years, explaining up to 47.1% of variance. The highest-turnover fund (HBL Islamic Equity Fund, 268.97%) has the lowest return (3.50%) and worst Sharpe ratio (−0.405), while the lowest-turnover fund (NBP Stock Fund, 33.87%) ranks among the top performers. Implications/Originality/Value: To our knowledge, this is the first Pakistani study combining turnover-based overconfidence proxies, conventional and Islamic funds, and market-state conditioning within one framework. Results are preliminary but theoretically grounded, with relevance for investor fund-selection heuristics and SECP disclosure policy.