“Mutual fund is a pool of money invested according to a common investment objective by an asset management company (AMC) on behalf of the fund’s investors”. A fund can make profits from three different sources, Dividend, Capital Gains and Appreciation of Share Price. The figure shows a mutual fund is deals with the following entities; trustee, auditor, SECP, AMC and investor. A mutual fund provides liquidity, portfolio management expertise, risk diversification, and stability to stock market [1] and it also mobilizes savings by attracting funds from small investor.
Investment firms (banks, Financial Institutions) managed by financial professional lists that rise its capital by selling its shares to the public. Mutual Fund’s capital is invested in a pool of corporate securities, commodities. The level of mutual funds income from its portfolio’s determines the daily market value called Net Assets Value at wider its units are redeemable on any business day and the dividend paid to its units holders.
Under the Trust Act of 1882 Mutual funds in Pakistan are registered and legally established in the form of a Trust. The mutual fund industry in Pakistan is regulated by; the Securities and Exchange Commission of Pakistan (SECP) which licenses each Asset Management Company in strict agreement with the NBFC Rules, 2003 and requires all AMC’s to obtain an independent rating.
Mutual Funds introduced in Pakistan in 1962, with the public offering of National Investment (Unit) Trust (NIT), followed by the establishment of the Investment Corporation of Pakistan (ICP) in 1966.
Pakistan’s financial sector has witnessed many developments in the recent past that has unfolded different forms of investment alternatives paving way for financial institutions to grow accordingly. It has tremendous growth potential as our country is amongst the most profitable nations to prevail in the origin. It can play a vital role in areas like leasing, insurance business, and can contribute heavily towards the economic growth. Services sector has constituted around 54 percent share towards the GDP.
In last few years, improvement in the economic stability of Pakistan have resulted in the out performance of different industries that have contributed a great deal in raising general public wealth and have improved overall investor’s confidence in the financial and equity markets. Where industries like banking, Financial institutions, Oil & gas, Technology and many more were giving great profit margins to their shareholders; Mutual fund industry at that time provided the time needed food for general public and for corporate by launching simple and diversified investment horizons that attracted most of the nation.
It has become difficult for the small investors to directly invest in the stock market keeping in view the growth of the capital market in Pakistan and the phenomenal increase in share prices. Another difficulty is controlling the volatility of return over investment. These two are the main factors that have contributed in the remarkable growth of Mutual Fund Industry in Pakistan. But we can never forget the tremendous support this industry has received from the Government of Pakistan through Securities and Exchange Commission of Pakistan.
There are two main types of Mutual Funds
Opened Ended Funds
Close Ended Funds
Where the capitalization of the fund is not fixed and more units can be sold at any time to increase its capital base.
Where capitalization is fixed and limited to the number of units authorized at the fund inception.
Mutual funds are usually charge a management fee 1% to 3% of the fund’s annual earning and may also charge other fees, sales commission called Loads.
Opened end or class-end funds can be of several types, however most basic classifications are:-
Stock funds.
Income and money market funds.
Pension funds.
Islamic funds
specialty funds
The performance Analysis is important because with the help of we can compare different return earn by different mutual funds. Further it elaborates the level of risk involve in various mutual funds. It helps an investor where he should invest his money means an investor sees higher return along with minimum risks.
Financial systems in a modern economy transfer resources over space, time and sectors. The flow of funds in a financial system occurs through financial systems and financial intermediaries. The major functions of this system are to transfer resources, manage risk, subdivide and pool funds and clear transactions.
These financial systems permitted investments to be committed to their most productive uses rather than being bottled up where they are least needed. Mutual funds in this regard help the economy to continuously rotate money in and out of the systems to make it remain hydrant. The mutual funds not only pools but subdivides the funds based on the need of individual investor.
The current and past environment of Pakistani Financial markets have always supported the Mutual fund industry due to their ability to pool and diversify investments that helps the money rotates to complete the fund transfers in and out of economy. The current scenario is a clear indication of the rising income levels as the money flow in the industry have shown a sharp increase in last three to four years. This rise have not only mobilized the money rotation but have also helped economy to develop at a much desired pace to beat inflation and help country fight out the phases of past recession that have somehow dampened the economic growth and prosperity.
In many developing countries, including several middle-income countries in Asia and the Pacific, the mutual funds industry has displayed considerable progress in recent years. Although Pakistan had an early start with the setting up of NIT in 1962 and subsequently the ICP mutual funds, for almost 40 years, until 2002, the progress made was lackadaisical at best. In fact, the industry suffered both as a consequence of poor management as well as Government intervention and the distortions thus induced. During the past five years, prompted by positive changes in Government policy and regulation, as also measures to privatize and allow new entrants, the industry has witnessed major improvements and enhancement.
A number of researchers have empirically evaluated the Funds performance with it attributes in different time periods for the developed economies (Soderlined et al,2000; Korkeamaki and smythe,2004) .
A research were carried by Otten and Bams (2002) Maastricht University, in 2002 on European mutual funds. The results recommend that mutual funds particularly small capitalization funds are capable to add value. The author also indicated that industry is still covering behind the United State industry both in market capitalization and assets size.
In 2001 Malkiel and Radisich research found that over the 1990s in the united state index funds produced return more than active funds by 1 to 2 hundred points per year. He found that passive funds perform well due to two reasons management fee and trading costs.
Therefore, Mutual funds performance is one of the most frequently studied topics in investments area in most countries. The reason for this popularity is availability of data and the importance of mutual funds as vehicles for investment in the stock market for both individuals and institutions. Mutual funds generally provide three benefits to their investors.
First, they reduce the risk of investing in the stock market by diversification. Second, they provide professional management by experts in the stock market and third, by pooling of investment funds, they allow small investors to hold a diversified portfolio.
First, and third benefit of the mutual funds is consider as real benefits. The second benefit of having access to financial expertise has been questioned extensively in finance literature. A vast amount of literature exists in finance on the topic of market efficiency that recommends passive investment and suggests that paying money to so-called investment professionals is a fool’s game. As evidence they have tested again and again the performance of these professionals, such as mutual funds, and found evidence to support their hypotheses of market efficiency. Pakistani investors have not been catch with tremendous interest untile recently (on the academic side there are two recent papers on the role of corporate governance and mutual funds in Pakistan by Cheema and Shah (2006) and Saeed and Syed (2005).
Evaluation of funds performance seems a straight affair as one has to do is determine the rate of return earned by investing in each mutual fund and then ranking the funds accordingly, the best fund being the one that provides the highest return. A quick look at the returns tells us that there is great variability in returns over time for any fund. A fund may do well in one year but not so in another. Though comparison of performance on the basis of returns is the simplest, it is also wrong. The missing ingredient is risk. It is now considered a generally accepted fact in finance that there is a direct relationship between risk and return: the higher the risk, the higher is the expected return.
There are two things clear firstly that the analysis should be done over a long period of time to be of significance, and secondly that risk has to be incorporated in the analysis. It is the second requirement, the inclusion of risk that is the problem.
Two popular ways of defining risk in finance – standard deviation of returns (In 1960 William F. Sharpe introduced the concept of risk free asset. Combing the risk free asset with the Markowitz efficient portfolio he introduced the capital market line as the efficient portfolio line. In order to determine which portfolio offer the most positive risk/return trade-off, the ratio of the historical returns in excess of the risk-free rate to the standard deviation of the portfolio returns is calculated.
The two types of risk systematic risk and unsystematic risk were introduced by Treynor. He indicated that systematic risk is connected with market .it cannot be diversified away .It can be calculated by beta. He says a portfolio expected return depends on its beta. The Other type of risk is Unsystematic risk which is specific to a company. The uncertainty attached with the specific company can be diversified away.
Standard deviation captures the overall variability of returns.
Beta captures that component of the risk that cannot be diversified away.
Thus, according to CAPM, beta is the only relevant measure of risk. When it comes to evaluating the performance of a mutual fund it is not clear whether standard deviation or beta is the relevant measure of risk. If the investors invest only in a mutual fund then the relevant measure of risk is the standard deviation of the returns of the mutual fund. However, if the fund were to be a part of a well-diversified portfolio then the relevant measure of risk would be the beta.
In the literature, we found the following most commonly used risk-adjusted performance measures based on ex-post returns in the perspective of Capital Asset Pricing Model (CAPM):
• Sharpe’s measure (Sharpe, 1966)
• Treynor’s measure (Treynor, 1965)
• Jensen’s Alpha (Jensen, 1968)
The above measures are derived by capital market theory and the CAPM and dependents upon the assumptions involved with this theory.
Management fees effects the performance of the fund.
Past performance of a fund do not guarantee future performance of the funds.
Return of the fund cannot indicate the performance of the fund unless risk factors are included.
The following are the Population of Research
1
ABL Income Fund
Sep – 2008
Income Fund
2
AKD Income Fund
Mar – 2007
Income Fund
3
Meezan Islamic Income F und
Jan – 2007
Islamic Fund
4
Meezan Sovereign Fund
Feb – 2010
Islamic Income
5
Al Falah GHP Income Fund
Multiplier
Jun – 2007
Aggressive Fixed Income Fund
6
Metro Bank Pakistan Sovereign Fund 12/12
Mar – 2003
Income Fund
7
Metro Bank Pakistan Sovereign Fund (perpetual)
Mar – 2003
Income Fund
8
Pakistan Income Encashment Fund
Aug – 2008
Aggressive Fixed Income Fund
9
Pakistan Income Fund
Mar – 2002
Income Fund
10
Askari Income Fund
Mar – 2006
Aggressive Fixed Income Fund
11
Askari Islamic Income Fund
Sep – 2009
Islamic Fund
12
Atlas Islamic Fund
Mar-2004
Income Fund
13
Atlas Islamic Income Fund
Oct – 2008
Islamic Income
14
BMA Chundriger Road Sovereign Fund
Aug-2007
Income Fund
15
Crosby Phoenix Fund
Aug-2009
Income Fund
16
Dawood Money Market fund
May-2003
Income Fund
17
Faysal Islamic Growth Fund
Oct-2005
Islamic Income
18
Faysal Savings Growth Fund
May-2007
Income Fund
19
First Habib Income Fund
May – 2007
Income Fund
20
HBL Income Fund
Feb – 2007
Income Fund
21
IGI Aggressive Income Fund
Oct – 2007
Aggressive Income Fund
22
IGI Islamic Fund
April – 2009
Islamic Income
23
IGI Islamic Income Fund
Dec – 2009
Aggressive Fixed Income Fund
24
Js Aggressive Income Fund
Jan – 2008
Income Fund
25
JS Income Fund
Aug – 2002
Aggressive Fixed Income Fund
26
KASB Income Opportunity Fund
May-2006
Islamic Aggressive Fixed Income Fund
27
KASB Islamic Income Opportunity
Jun-2008
Income Fund
28
Lakson Income Fund
Jun-2009
Income Fund
29
MCB Dynamic Cash Fund
Jan-2007
Income Fund
30
NIT-Government Bond Fund
Nov-2009
Income Fund
31
NIT-Income Fund
Feb-2010
Income Fund
32
NAFA Income Fund
Mar-2008
Income Fund
33
NAFA Income Opportunity Fund
Apr-2006
Islamic Aggressive Fixed Income Fund
34
NAFA Islamic Aggressive Income Fund
Oct-2007
Income Fund
35
NAFA Savings Plus Income Fund
Nov-2009
Income Fund
36
Pak Oman Advantage Islamic Fund
Oct-2008
Islamic Income
37
PICIC Income Fund
Jul-2010
Income Fund
38
UBL Islamic Savings Fund
Nov-2010
Islamic Income
39
UBL Savings Income Fund
Oct-2010
Income Fund
40
United Growth & Income Fund
Mar-2006
Aggressive Fixed Income Fund
41
United Islamic Income Fund
Oct-2007
Islamic Aggressive Fixed Income Fund
42
Pak Oman Advantage Fund
May-2007
Income Fund
The Judgment sampling has been used because availability of data is important for any research. Pakistan Income funds have not lifetime more than 12 years and majority of funds have existence of less than 6 years. The research sample consists 6 Income Funds of different 6 Fund management institution.
The Sample is
1
Pakistan Income Fund
May-2007
Income Fund
1,936,742
2
Faysal Savings & Growth Fund
Mar-2007
Income Fund
6,352,502
3
Js Income Fund
Aug-2002
Aggressive Fixed Income Fund
743,074
4
United Growth & Income Fund
Mar-2006
Aggressive Fixed Income Fund
4,267,400
5
HBL Income Fund
Feb-2007
Income Fund
1,525,374
6
Askari Income Fund
Mar-2006
Aggressive Fixed Income Fund
1,283,277
The data was collected from July-2008 to June-2010 from various sources. The six month T. Bills rate was used as Risk Free Return () and Return on market ( ) of funds was calculated by using 1 month KIBOR rate.
Secondary data was required for this research and collected from the authenticated sources which are legally authorized to publish the data.
The secondary data has been collected from authentic sources for the analysis which has recorded and transformed into a meaningful quantitative data so that certain statistical tools will be applied.
I have extracted 1 Month Kibor Rate from July-2007 to June-2010. Selected Institutions data was transformed into Quantitative Form for the use of analysis.
Risk Free Rate was extracted from the site of State bank of Pakistan.
Price of the Selected Fund was collected from their respective Site.
The following are research variable
Net Asset Value of Fund
Monthly Return
Beta of Funds return with Market
Return on Market
Return of Risk Free Assets
Risk Adjusted Performance
“The Rupee value of a single fund share, based on the value of the underlying assets of the fund minus its liabilities, divided by the number of shares outstanding Calculated at the end of each business day.
Monthly Return is the Monthly gain or loss on investment.
Beta is a measure of risk that, when applied to investment portfolios (as distinct from individual stocks), provides useful statistical information. It indicates a fund’s past price volatility relative to a particular stock market index.
As a whole the return on market is called the market portfolio.
The Returns on Risk Free Assets is a theoretical interest rate that would be returned on an investment which is completely free of risk.
The Performance of security or investment relative to its risk is called Risk Free Adjusted Performance.
The procedure is used for the performance analysis of income Funds are
Sharp Ratio
Jensen’s Alpha
Treynor’s Measure
In order to determine which portfolio offering the most favorable risk/return trade-off, we compute the ratio of the historical returns in excess of the risk-free rate to the standard deviation of the portfolio returns. The portfolio offering the highest reward/risk ratio then is the only risky portfolio in which investors will choose to invest. Using average returns of the portfolio
Sharpe ratio is used to measure ex-post portfolio performance.
= the observed average fund return;
= the average risk free return;
= the standard deviation of fund returns.
This model is used to measure the performance of a managed portfolio in respect of return per unit of risk. This ratio also measures the portfolio manager’s ability on the basis of rate of return performance and diversification by taking into account total risk of the portfolio.
Treynor model is used to measure the performance of a managed portfolio in respect of return per unit of risk (systemic risk). In this way the mutual fund provides the highest return per unit of risk (systemic risk) will be preferred as compared to the fund provides low return per unit of risk. Treynor ratio uses Beta as a risk measure hence considers the Systematic risk. This ratio also measures the portfolio manager’s ability on the basis of rate of return performance and diversification by taking into account systemic risk of the portfolio. This ratio measures the historical performance of managed portfolio in terms of return per unit of risk (systemic risk).
= the observed average fund return;
= the average risk free return;
β = coefficient as a measure of systematic risk.
Treynor Ratio indicate that the portfolio offering the highest reward/risk (systemic risk) ratio will be the only risky portfolio in which investors will choose to invest.
The assumption is that the portfolio manager has diversified away the diversifiable risk (unsystematic risk/company specific risk) and the matter of concern for the investor should be the systematic risk (non-diversifiable/market risk) only, instead of total risk
Jensen in 1969 introduced alpha (α) in the capital asset pricing model to measure the abnormal return of a portfolio—that is difference between the actual average return earned by a portfolio and the return that should have been earned by the portfolio given the market conditions and the risk of the portfolio.
Jensen measure is calculated as follows:
= the observed returns of the portfolio
= the risk free returns
= the return on the market index
α and β = are the parameters of the model.
The results are presented and interpreted below with the help of tables.
1
Pakistan Income Fund
0.09
0.10
0.10
0.13
0.14
0.12
0.28
2
Faysal Income & Growth Fund
0.10
0.10
0.09
0.13
0.11
0.12
0.28
3
United Growth & Income Fund
0.08
0.10
0.10
0.13
0.10
0.12
0.28
4
HBL Income Funds
0.09
0.10
0.09
0.13
0.10
0.12
0.28
5
Askari Income Fund
0.09
0.10
0.12
0.13
0.02
0.12
0.28
6
JS Income Fund
0.10
0.10
0.11
0.13
(0.08)
0.12
0.28
Table 1 summaries the Returns of the funds (Rp) and Returns of the market (Rm) for three years. This table indicates that Pakistan Income Fund Performed 7% above the market on average where as in 2009 Askari Income Fund beats the market with highest return. United growth and Income fund beats the marker by 1% along with Js income Fund one of the oldest Fund underperformed the market by 15% . This indicates that experience of fund market does not guarantee their outperformance the Market. Askari income fund and JS Income fund could not maintain their performance successively for three years.
1
Pakistan Income Fund
(1.092)
0.461
0.479
0.576
1
2
Faysal Income & Growth Fund
0.004
(0.433)
(0.070)
(0.501)
2
3
JS Income Fund
(0.011)
(0.051)
(0.506)
(0.560)
3
4
United Growth & Income Fund
(0.461)
(0.160)
(0.295)
(0.609)
4
5
HBL Income Funds
(0.829)
(0.211)
(0.297)
(0.784)
5
6
Askari Income Fund
(1.556)
(1.211)
(1.326)
(3.055)
6
(0.657)
(0.267)
(0.336)
(0.822)
The Table 2 indicates that sample average Sharp ratio is (0.822). It indicates that industry has generated negative risk premium return of (0.822%) per unit of total risk taken by the funds. The highest average risk premium return earned is by the Pakistan Income Fund 0.576% but it has generated negative risk premium return (1.092) in 2008.This ratio find out the fund manager’s performance with respect to return as well as diversification. Investor should select funds which have a dependable history of earning higher risk premium based on multi year comparison based on proposed duration of investment. Short term investors should focus on the yearly sharp ratio where as long term investor should focus on average Sharp Ratio of the firm over the years. Five funds could not perform well and lost on the basis of the total risk in the three year time period .One of the oldest fund Askari income fund ranked lowest as it lost (3.055).
1
Pakistan Income Fund
0.073
1.470
0.977
2.471
1
2
Askari Income Fund
0.591
1.934
(0.149)
1.982
2
3
United Growth & Income Fund
(0.337)
1.499
(0.142)
1.245
3
4
JS Income Fund
(0.003)
0.747
(0.335)
0.412
4
5
HBL Income Funds
(0.051)
1.711
(1.488)
0.206
5
6
Faysal Income & Growth Fund
0.003
0.622
(0.680)
(0.057)
6
0.05
1.33
(0.30)
1.04
The Table 3 indicates the Treynor’s measure of Income Funds of the sample. The industry average is 1.04. Five funds could beat the market on both diversification and reduction in unique risk of the fund. Ideally in well diversified portfolio Sharp Ratio and Treyon’s Ratio should be same but in the Sample no funds had the same value of both ratios indicating lack of complete diversification on part of the portfolio managers. They are not reducing the risk for investors. The most diversified fund in sample is Pakistan Income Fund followed by Askari Income Fund, United Growth & Income Funds. Faysal Income & growth Fund had negative beta which resulted in a lower Treynor’s value.
1
Pakistan Income Fund
(0.007)
0.075
0.024
0.096
1
2
United Growth & Income Fund
(0.015)
0.034
(0.024)
0.004
2
3
Faysal Income & Growth Fund
(0.000)
(0.036)
(0.005)
(0.042)
3
4
HBL Income Funds
(0.007)
(0.042)
(0.024)
(0.068)
4
5
Askari Income Fund
0.005
(0.007)
(0.099)
(0.104)
5
6
JS Income Fund
(0.002)
(0.014)
(0.207)
(0.222)
6
(0.004)
0.002
(0.056)
(0.056)
The industry average for 2009 in Table 4 shows a positive Jensen’s Alpha of 0.002.This indicate that fund managers are able to pick up securities and time the market in such a way that they are able to earn positive income the industry was able to beat market return by 0-002 percent per anum. The overall three years Jensen Alpha in negative (0.056) due to UIGF, HBL, AIF and Js Income Fund. Askari Income Fund and United Growth & income fund beats the market by 0.005% and 0.034% points respectively. Two top funds out off six funds are subsidiaries of Large Banks of Pakistan that there experience of bonds market helping them to generating higher return despite less time of operation in income funds.
1
Pakistan Income Fund
1
1
1
1
2
Faysal Income & Growth Fund
2
2
6
3
3
United Growth & Income Fund
3
4
3
2
4
HBL Income Funds
4
5
5
4
5
Askari Income Fund
5
6
2
5
6
JS Income Fund
6
3
4
6
Table 5 lists the summary ranking of the entire sample Income funds on the basis of Return on Portfolio, Sharp Ratio, Treynor’s ratio and Jensen’s Alpha. The fund with highest retruns significantly lags behind when its return is adjusted for risk. This indicates that the investors should not only look for the return but also for the risk involved in it. Risk and Return analysis will result in a decision of investing a fund which will have strong tendency of generating highest possible return with lowest possible risk. This characteristic is indicated by Js Income fund which equals the market return in 2008 with low risk while Pakistan Income funds could maintain its performance successively for three years but its risk is higher in all funds.
After thorough study and analy
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