Evaluating Mutual Fund Performance and Persistence

RESEARCH PROBLEM

Mutual funds in recent years have attracted attention globally. According to ICI Global (2014), assets under management of mutual funds across the globe grew by 725% from trillion in 1993 to almost trillion in September 2013. This attraction to mutual funds is driven by the widely reported suitability of collective investment schemes to the investment needs of a large population of investors who do not have the experience and sophistication to manage investment in securities on their own (Rouwenhorst, 2004).

It has been claimed that, among others, mutual funds provide diversification benefits, low cost advantages, professional management, transparency, liquidity and a range of products with a variety of risk-return profiles to investors (Reilly & Brown, 2015).

However, the performance of mutual funds has been a subject of intense intellectual debate over the years. Following the pioneering work of Treynor (1965), Sharpe (1966), and Jensen (1968), researchers have continued to beam their searchlights on whether or not mutual funds do beat the market and deliver excess risk-adjusted returns. More recently, attention has shifted towards whether past performance of individual funds can be used to predict their future performance and hence provide a basis for fund selection. That is, do funds that perform well in a prior period continue to replicate such performance in future periods? This is the concept of performance persistence (Funds Management Research Centre, 2002).

Some studies have shown that portfolio managers are not able to consistently outperform the market (Elton, Gruber, Brown & Goetzmann, 2014; Mohamed, Ganesh & Muroki, 2014; Tan, 2015). In addition, high administrative and management fees of most funds tend to wipe out any excess returns (Elton et al, 2014). Finally, the returns from a fund is a function of the superior ability of the fund manager, which is difficult to predict as past performance cannot be used to predict future performance (Elton et al, 2014).

Overall, evidence from the literature supports the position that there is no consensus among researchers on the performance and performance persistence of mutual funds (Elton et al, 2014). It is therefore doubtful whether professional managers have superior ability and skill, and whether it is worth the trouble employing the services of professional managers. Against this background, there appears to be a lot of room for further research on the subject.

Specifically, in Nigeria, there is a dearth of research on mutual funds. This study therefore will enrich the existing literature on mutual funds in Nigeria and make a contribution towards bridging the wide knowledge gap on the subject. The result of the study will guide investors, investment advisers and fund managers in investment planning and decision making. The study will also extend the frontiers of knowledge in finance, securities and investment in the Nigerian capital market.

RESEARCH PURPOSE

The purpose of this study is to evaluate the performance and performance persistence of mutual funds in Nigeria. The topic has been chosen because of the increasing interest in mutual funds as an asset class in promoting savings and investment culture in Nigeria. I would explore the question of whether mutual funds provide positive risk-adjusted returns, and whether funds display persistence of performance.

The study will adopt a positivist philosophy. This is a research paradigm that holds that only knowledge gained through observation and measurement is reliable and trustworthy, and that research findings are observable and quantifiable (O’Farrell & Wallace, 2012). The positivist paradigm usually assumes the existence of a dependent variable and one or more independent variable(s) (Wisdom & Creswell, 2013). Since the aim of the study is to evaluate the performance and performance persistence of mutual fund, a phenomenon assumed to exist ‘out there’, the study can be firmly placed within the positivist framework

Quantitative research method will be used for the study. Specifically, historical data on monthly Net Asset Values (NAVs) of all actively managed mutual funds in Nigeria from January 2010 to December 2018 (8 years) will be collected from the Securities and Exchange Commission, the Nigerian Stock Exchange and Fund Managers Association of Nigeria. The data will be subjected to statistical analysis to test the performance and performance persistence of mutual funds in Nigeria.

RESEARCH APPROACH

Quantitative research approach will be adopted for the study as it aligns closely with the positivist research paradigm, the philosophical basis adopted for the study. A positivist researcher assumes that the same analytical approach applicable in the sciences and engineering are equally applicable to social sciences. He assumes there is an underlying reality which the researcher can find out by observation or logical reasoning (O’Farrell & Wallace, 2012).

The quantitative approach tends to be associated with quantitative measurement, the hypothesis-based approach, collection of relatively large sample size, and testing theories statistically. The quantitative approach also assumes that the researcher seeks to be detached from what is being observed that research success can be achieved by observation and that results have an objective meaning (O’Farrell & Wallace, 2012). All these assumptions are consistent with the type of analysis required to evaluate the performance and performance persistent of mutual funds.

Using the quantitative research approach for this study presents some clear advantages. First is the fact that the result of the study is ‘generalizable’.This is possible because of the relatively large sample size usually associated with quantitative research, which ensured that the sample is representative of the population. Further, provided the research has been properly designed and executed, results are statistically reliable; Finally, the degree of reliability of the result can be assessed fairly easily through the use of appropriate statistical analysis (O’Farrell & Wallace, 2012).

The above considerations provide justification for adopting quantitative research approach for this study.

References

1. Elton, E.J., Gruber, M.J., Brown, S.J. & Goetzmann, W.N. (2014). Modern portfolio theory and investment analysis. (9th ed.). U.S.A: Wiley & Sons Inc.
2. Funds Management Research Centre (2002). A review of the research on the past performance of managed funds. Report 22. Retrieved from https://download.asic.gov.au/media/1337666/FMRC_Report.pdf
3. ICI Global (2014). Globalisation and the Global Growth of Long-Term Mutual Funds. vol.1(1). Retrieved from https://www.ici.org/pdf/icig_per01-01.pdf
4. Jensen, M. (1968). The performance of mutual fund in the period 1945-1964. Journal of Finance, 23, 389-416.
5. Mohammed, S.D., Ganesh, P.P. and Muroki, F. (2014). The performance persistence of equity and blended mutual funds in Kenya. International Journal of Economics and Finance; vol 6, No8.
6. O’Farrell, P. & Wallace, W. (2012). Introduction to Business Research 1: The Research Proposal. Great Britain. Edinburgh Business School.
7. Reilly, F.K. & Brown, K.C. (2015). Analysis of investment and management of portfolios. (Europe, Middle East and Africa ed.). Hampshire, UK: Centage Learning.
8. Rouwenhorst, K. G.(2004). The Origins of Mutual Funds (December 12, 2004). Yale ICF Working Paper No. 04-48. Available at SSRN: https://ssrn.com/abstract=636146
9. Sharpe, W.F. (1966). Mutual fund performance. Journal of Business, January, pp119-138.
10. Tan, O.F, (2015). Mutual fund performance: Evidence from South Africa. Emerging Markets Journal, 5(2), pp 49-57.
11. Treynor, J. (1965). How to rate management investment funds. Harvard Business Review, 43, January - February, no. 1, 63-75.
12. Wisdom, J. & Creswell, J.W. ( 2013). Mixed methods: integrating quantitative and qualitative data collection and analysis while studying patient-centered medical home models. AHRQ Publication No. 13-0028-EF, pp5.