Performance Evaluation of Active (5 Funds

of 5 AMCs) and Passive Investment

Management
Submitted to: Md. Saimum Hossain, CFA, Lecturer, Department of Finance,
University of Dhaka.

Course No. F-407 Submission Date: 3/3/18 Portfolio Management

 Group profile

Name Roll
Md. Faysal 20-006
Mobassira Fabiha Haque 20-024

Afrida Masud 20-032

Ananta Prosad Paul 20-036

Mushfiqur Rahman 20-060
Abdullah Al Faisal 20-064
Arkapriya Biswas 20-082
Mohammad Atikur Rahman 20-100
Al-Faysal Bin Amin 20-168
Parbon Acharjee 20-212

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Table of Contents
Executive Summary: .............................................................................................................................. 4

Chapter 1: Introduction ......................................................................................................................... 5

Origin of the Report ........................................................................................................................... 6

Objectives of the Report .................................................................................................................... 6

Methodology ...................................................................................................................................... 6

Limitations ......................................................................................................................................... 6

Chapter 2: Theoretical Background ...................................................................................................... 7

What is a Mutual Fund? ..................................................................................................................... 8

How to diversify risk through Mutual Funds? ................................................................................... 8

Risks Involved in Investing in Mutual Funds .................................................................................... 8

Performance indicators of mutual funds ............................................................................................ 8

Types of Mutual Fund ........................................................................................................................ 9

Chapter 3: Mutual Funds in Bangladesh ............................................................................................. 10

EBL NRB MUTUAL FUND: .......................................................................................................... 11

IFIC 1st Mutual Fund: ..................................................................................................................... 11

1st Janata Bank Mutual Fund:.......................................................................................................... 11

NLI 1st Mutual Fund: ...................................................................................................................... 12

The Southeast Bank 1st Mutual Fund: .............................................................................................. 12

Chapter 4: Performance Evaluation Techniques (of Active and Passive Investment Management) .. 13

Performance Identification of Passive Investment Management: ................................................... 14

Passive Investment (Indexing): .................................................................................................... 14

Index Return Calculation: ............................................................................................................ 15

Performance Identification of Active Investment Management: ...................................................... 15

Active Return Calculation: .......................................................................................................... 15

Active and Passive Investment Performance Evaluation Techniques: ............................................ 16

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Chapter 5: Comparative Overview of Passive and Active Investment Performance (NLI First Mutual
Fund, Southeast Bank 1st) ................................................................................................................... 17

EBL NRB Mutual Fund : ................................................................................................................. 18

IFIC Bank 1st Mutual fund: ............................................................................................................. 19

1st Janata Bank Mutual fund: .......................................................................................................... 20

NLI first Mutual fund....................................................................................................................... 21

Southeast Bank 1st ........................................................................................................................... 22

Other Performance Measures:.......................................................................................................... 23

Conclusion ........................................................................................................................................... 24

References ............................................................................................................................................ 25

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Executive Summary:
The topic of this report is “Performance Evaluation of Active (five Funds of five AMCs) and
Passive Investment Management”. To prepare the report, a process was followed in order to
complete the work in an efficient manner. At first, we held a discussion about the process we should
follow to prepare the report and decided to collect secondary data

A Mutual Fund is a body corporate registered with the Securities and Exchange Commission (SEC)
that pools up the money from individual/corporate investors and invests the same on behalf of the
investors/unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and
distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in
a basket of assets.

The Mutual Fund sector in Bangladesh is still at a nascent stage as it is very small compared to the
capital market. There are 36 Mutual Funds listed in the country's stock market. Mutual fund sector
ranks 12th based on total market capitalization

It is important for the fund managers to check how the funds are performing annually compared to
other comparable funds. Sometimes fund managers over perform the market, which means it earns
more than benchmark (market), and sometimes underperform which is just the opposite.

It has been seen that in 2016 the chosen 5 mutual funds (EBL NRB MUTUAL FUND, IFIC 1st Mutual
Fund, 1st Janata Bank Mutual Fund, NLI 1st Mutual Fund, The Southeast Bank 1st Mutual Fund) have
outperformed when they were managed passively but in 2017 they performed better when managed
actively.

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 Chapter 1:
Introduction

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Origin of the Report
The topic of this report is “Performance Evaluation of Active (five Funds of five AMCs) and
Passive Investment Management”. The report is prepared for the requirement of course F-407;
Portfolio Management under the academic supervision of our course teacher, Mr. Md. Saimum
Hossain, CFA, Lecturer, Department of Finance, University of Dhaka.

We gave our best effort in practical implication of our knowledge regarding portfolio management.
The report contains the information on the assigned topic collected from various websites and from
our recommended text. We are able to maximize our potentiality in this sector also our through
knowledge on investment management, which is the result of this report preparation.

Objectives of the Report

 To imply our knowledge of portfolio management practically.
 To give an overview of Seven Asset Management Company’s profile
 To identify whether the AMCs are performing well above the index or passive portfolio or not
 To develop the assessment mechanism for evaluating the performance of active and passive
fund management

Methodology
To prepare the report, a process was followed in order to complete the work in an efficient manner. At
first, we held a discussion about the process we should follow to prepare the report and decided to
collect secondary data. Then we have divided the tasks among our group members. Then we collected
secondary data from Dhaka Stock Exchange, various websites and some theoretical information from
our recommended course curriculum conducted by our course teacher. We summarized collected
data, and then analyzed it to prepare this report.

Limitations
 Lack of Experience: As we are really new in this field of study, we felt lack of experience in
every stage of our work.
 Difficulty to Analysis: As the topic is new to us, it is hard for us to collect relevant data on the
topic and analyse those.
 Lack of Time: As we are new in this type of practical scenario analysis, we face the time
constraint.

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 Chapter 2:
Theoretical Background

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What is a Mutual Fund?
A Mutual Fund is a body corporate registered with the Securities and Exchange Commission (SEC)
that pools up the money from individual/corporate investors and invests the same on behalf of the
investors/unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and
distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in
a basket of assets.

How to diversify risk through Mutual Funds?

Mutual fund investments are not totally risk free. In fact, investing in mutual funds bears the same risk
as investing in the equities; the only difference is that due to professional management of funds the
controllable risks are substantially reduced.

According to basic financial theory, an investor can reduce his total risk by holding a portfolio of assets
instead of only one asset. This is because by holding all the money in just one asset, the entire fortunes
of portfolio depends on this one asset. By creating a portfolio of a variety of assets, this risk is
substantially reduced.

Risks Involved in Investing in Mutual Funds

A very important risk involved in mutual fund investments is the market risk. When the market is
sluggish, most of the equity funds will also experience a downturn. However, the company specific
risks are largely eliminated due to professional fund management.

Performance indicators of mutual funds

a) Total returns given by the fund on different schemes,
b) The returns on competing funds,
c) The objective of the fund and
d) The promoter’s image

These are some of the key factors to be considered while taking an investment decision regarding
mutual funds.

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Types of Mutual Fund
According to structure, it can be of two types: Open End & Close End

a) Open- Ended Mutual Fund:

An open-end fund is one that is available for subscription all through the year. These
do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset
Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
b) Closed- Ended Mutual Fund:
A closed-end fund has a stipulated maturity period which generally ranging from 5 to
15 years. The fund is open for subscription only during a specified period. In this case,
the total size of the fund is limited by the size of the initial offer. This types of fund are
always listed in the stock exchange for liquidity.

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 Chapter 3:
Mutual Funds in Bangladesh

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EBL NRB MUTUAL FUND:
The EBL NRB Mutual Fund which was Tk. 150 crore divided into 150,000,000 units at par value of
Tk. 10.00 each. It’s a Closed-end Mutual Fund of ten years tenure and the objective of the Fund is to
provide attractive dividends to the unit holders by investing the proceeds in the various instruments in
the Bangladeshi Capital Market and Money Market. The main target Group are the Individuals,
institutions, non-resident Bangladeshis (NRB), mutual funds and collective investment schemes are
eligible to apply for investment in the Fund. EBL NRB Mutual Fund has been investing in the capital
market using a similar experienced world-class investment management process and professionals as
EBL First Mutual to earn the maximum benefit for its investors.

IFIC 1st Mutual Fund:

Total shares are 168,496,573 with a paid-up capital of 1,684,965,730. IFIC 1st Mutual Fund was
established under a Trust Designed 2009 between International Finance investment and IFIC bank as
a sponsor. The operation of the fund was commenced in 2010 by listing with Dhaka and Chittagong
Stock Exchange. ICB is the custodian of the Fund and Race Management PLC manages the operations
as the Fund Manager. The objective of the Fund to earn superior risk adjusted return maintaining a
diverse investment portfolio.

Cash 2.00% Cash Dividend

Dividends

Stock Re-Investment Units

Dividend (RIU) of 10%

1st Janata Bank Mutual Fund:

Tk. 200 crore divided into 200,000,000 units at par value of Tk. 10.00 each. In future the fund size will
not be changed and the face value Tk. 10.00 per unit. The objective of the Fund is to provide attractive
dividend to the unit holders by investing the proceeds in the various instruments in the Bangladeshi
Capital Market and Money Market. The investment management operation of RACE is managed by a
team of investment professionals and is guided by an Investment Committee. The Investment
Committee reviews the Fund portfolio selection process to ensure compliance with the objectives set
out in the Trust Deed. The current share value is 6.10-taka with the volume of 1433,882.

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NLI 1st Mutual Fund:
The size of the fund is tk. 50.00 crore divided into 5,00,00,000 units at par value of tk.10.00 each. The
sponsor’s contribution was 1,00,00,000 units of tk. 10 each at par for tk. 10,00,00,000.00. The Fund
does not invest more than 10% of its total assets in any one particular company. It also doesn’t invest
in more than 15% of any company’s total paid-up capital. VIPB Asset Management Company Ltd.
(VIPB AMCL) is a subsidiary of Venture Investment Partners Bangladesh (VIPB), the first private
venture capital investment firm in the country. It is the asset manager of the Fund, where ICB works
as a trustee.

The Southeast Bank 1st Mutual Fund:

Tk. 100 crore divided into 10,00,00,000 units at par value of Tk.10 each 3 Face value and Market Lot
Tk. 10.00 per unit; 500 units per lot 4 Nature Close ended Mutual Fund of 10 (ten) years’ tenure. The
sponsor is Southeast Bank, the Custodian is ICB and the asset management company is VIPBB
AMCL.VIPB Asset Management Companies, investment decisions are made based on comprehensive
research and thorough assessments of the corporate governance practices and the management of the
company.

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 Chapter 4:
Performance Evaluation Techniques (of
Active and Passive Investment Management)

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Performance Identification of Passive Investment Management:
Index funds are considered to be passively managed funds. The manager of a passively managed fund
tries to mimic the market. The fund manager buys the underlying assets of which the index consists.
He will also use the same weights of which the index is constructed. Investors will receive the same
return as the index minus the fund fees. Index funds are not trying to outperform the index, the risk
and return will follow the index.

According to the the Efficient Market Hypothesis (EMH), market prices fully reflect all available
information and expectations, so current stock prices are the best approximation of a
company’s intrinsic value. Attempts to systematically identify and exploit stocks that are mispriced on
the basis of information typically fail because stock price movements are largely random and are
primarily driven by unforeseen events. Although mispricing can occur, there is no predictable pattern
for their occurrence that results in consistent outperformance. The efficient markets hypothesis implies
that no active investor will consistently beat the market over long periods of time, except by chance,
which means active management strategies using stock selection and market timing cannot
consistently add value enough to outperform passive management strategies.

Sharpe concluded that, as a whole, active fund managers underperform passive fund managers, not
because there is anything inherently wrong in their financial strategies, but simply because of the laws
of arithmetic. For active managers to outperform the market, they have to achieve a return that can
overcome their fund expenses, which are much higher than passive funds due to higher management
fees, higher trading costs and higher turnover. This is consistent with Sharpe’s research which shows
that, as a group, active managers underperform the market by an amount equivalent to their average
fees and expenses.

When a passive management strategy is employed, there is no need to expend time or resources on
stock selection or market timing. Because of the short-term randomness of returns, investors would be
better served through a passive, structured portfolio based on asset class diversification to manage
uncertainty and position the portfolios for long-term growth in the capital markets.

Passive Investment (Indexing):

Indexing is a common passive approach to investing. Indexing refers to holding a portfolio of securities
designed to replicate the returns on a specified index of securities. Hence, in this report we will calculate
the return of DSE Broad Index as our passive investment return. And then we will compare it with the
return of active investment management.

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Index Return Calculation: We will calculate return for DSEX index in daily frequencies. The
calculation is done using the MS Excel.

Performance Identification of Active Investment Management:

Active investing, as its name implies, takes a hands-on approach and requires that someone act in the
role of portfolio manager. The goal of active money management is to beat the stock market’s average
returns and take full advantage of short-term price fluctuations. It involves a much deeper analysis and
the expertise to know when to pivot into or out of a particular stock, bond or any asset. A portfolio
manager usually oversees a team of analysts who look at qualitative and quantitative factors, then gaze
into their crystal balls to try to determine where and when that price will change.

Active investing requires confidence that whoever’s investing the portfolio will know exactly the right
time to buy or sell. Successful active investment management requires being right more often than
wrong.

Active Return (Mutual Fund Management):

AMCs (Asset Management Company) provides an investment vehicle for public that is mutual fund
where these AMCs follow an active investment management approach to generate superior return for
its investors. So, in this report we will identify the active returns generated by these portfolio managers
of seven AMCs.

Active Return Calculation:

This return calculation will also involve same data frequency mentioned in the passive return
calculation section and the timeframe will be from the respective fund’s inception period. The
calculation is done using the MS Excel.

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Active and Passive Investment Performance Evaluation Techniques:
The techniques that will be used for calculating the performance of active and passive investments are:

Measures Significance Formula

1 Return (Daily Not meaningful when 𝒏
Return not stated in combination 𝑹̅ = ∑ 𝑹𝒊
Average) of risk 𝒊=𝟏
2 Return Not meaningful when (1+𝑹̅ )^ 252- 1
(Annualized not stated in combination
Return) of risk

Here,

𝑅𝑖= 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑓 𝑒𝑎𝑐ℎ 𝑜𝑏𝑠𝑒𝑟𝑣𝑎𝑡𝑖𝑜𝑛

N = No. of Observations

RFR = Risk Free Rate

𝛽𝑖= 𝑆𝑦𝑠𝑡𝑒𝑚𝑎𝑡𝑖𝑐 𝑅𝑖𝑠𝑘

𝑅𝑚𝑡= 𝑀𝑎𝑟𝑘𝑒𝑡 𝑅𝑒𝑡𝑢𝑟𝑛

𝜎𝐸𝑅= 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑛 𝑜𝑓 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛

𝑅𝑏= 𝐵𝑒𝑛𝑐ℎ𝑚𝑎𝑟𝑘 𝑅𝑒𝑡𝑢𝑟𝑛

t=threshold return

𝜎𝐸𝑅= 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 (𝑎𝑏𝑜𝑣𝑒 𝑅𝐹𝑅)

𝐷𝑅𝑖= 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐷𝑒𝑣𝑖𝑎𝑡𝑖𝑜𝑛 𝑜𝑓 Downside Return (Below t)

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 Chapter 5:
Comparative Overview of Passive and Active Investment
Performance (NLI First Mutual Fund, Southeast Bank 1st)

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EBL NRB Mutual Fund :
In the following charts, the active return of EBL NRB Mutual Fund has been compared with the market
return in 2016 and 2017

2017 (Annualized) 2016 (Annualized)

MF(Active) Index(Passive) MF(Active) Index(Passive)
1.91% 25% 87% 10%

EBL NRB Mutual

Fund
87% Passive Return

25%

10%

2%

Interpretation: The active return of EBL NRB Mutual was 87%% while the market return was 10% in
2016 which indicates that the active return beats market return. So, EBL NRB Mutual performs better in
2016 than DSEX. However, the active return was 1.91% in 2017 while the market return became 25%.
The lower active return indicates poor performance of EBL NRB Mutual fund than DSEX in 2017.

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IFIC Bank 1st Mutual fund:
In the following charts, the active return of IFIC Bank 1st Mutual fund has been compared with the market
return in 2016 and 2017

2017 (Annualized) 2016 (Annualized)

MF(Active) Index(Passive) MF(Active) Index(Passive)
18.39% 25% 30% 10%

Passive Return

30% IFIC Bank 1st

Mutual fund

25%

18%

10%

Interpretation: The active return of IFIC Bank 1st Mutual fund was 30%while the market return was
10% in 2016, which indicates that the active return beats market return. So, IFIC Bank 1st Mutual fund
performs better in 2016 than DSEX. However, the active return was 18.39%in 2017 while the market
return became 25%. The lower active return indicates poor performance of IFIC Bank 1st Mutual fund
than DSEX in 2017.

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1st Janata Bank Mutual fund:
In the following charts, the active return of 1st Janata Bank Mutual fund has been compared with the
market return in 2016 and 2017.

2017 (Annualized) 2016 (Annualized)

MF(Active) Index(Passive) MF(Active) Index(Passive)
14.28% 25% 47% 10%

Passive Return
47%

1st janata Bank

Mutual fund

25%

14%

10%

Interpretation: The active return of 1st Janata Bank Mutual fund was 47%while the market return was
10% in 2016 which indicates that the active return beats market return. So, 1st Janata Bank Mutual fund
performs better in 2016 than DSEX. However, the active return was 14.28%in 2017 while the market
return became 25%. The lower active return indicates poor performance of 1st Janata Bank Mutual fund
than DSEX in 2017.

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NLI first Mutual fund
In the following charts, the active return of NLI first mutual fund has been compared with the market
return in 2016 and 2017.

Year NLI First Mutual Fund Market Return

2016 40% 10%

2017 17% 25%

Interpretation: The active return of NLI mutual fund was 40% while the market return was 10% in 2016
which indicates that the active return beats market return. So, NLI performs better in 2016 than DSEX.
However, the active return was 17% in 2017 while the market return became 25%. The lower active return
indicates poor performance of NLI first mutual fund than DSEX in 2017.

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Southeast Bank 1st
In the following charts, the active return of Southeast Bank 1st has been compared with the market return
in 2016 and 2017.

Southeast Bank Market

Year 1st Return

2016 39% 10%

2017 18% 25%

39%

25%

18%

10%

Southeast Bank
1st
Passive Return

Interpretation: The active return of Southeast bank 1st was 39% while the market return was 10% in
2016, which indicates that the active return beats market return. Therefore, Southeast bank 1st performs
better in 2016 than DSEX. However, the active return was 18% in 2017 while the market return became
25%. The lower active return indicates poor performance of southeast bank 1st than the DSEX in 2017.

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Other Performance Measures:
2017
EBL
NRB
Mutual IFIC Bank 1st 1st janata Bank NLI First Southeast
Item Fund Mutual fund Mutual fund Mutual Fund Bank 1st
0.04
Risk free rate 25
Average Market
return 25%
Active Return 1.91% 18.39% 14.28% 16.80% 18.29%
1.34755 0.45465455
Beta 2203 1.38108118 1.52470409 0.14093483 9
standard deviation 0.35880 0.16575825
(annualized) 7938 0.303071958 0.321718425 0.147351625 5
-
Sharpe ratio 0.06525 0.84696665
3287 0.466594288 0.311736011 0.85193077 8
-
Treynor 0.01737 0.30878765
4761 0.102391986 0.065777497 0.890719371 6
-
Jensen's Expected 0.30242 0.04625496
Return 5642 -0.144542813 -0.215400529 0.096352663 2
2016
0.042
Risk free rate 5
Average Market return 10%
Active Return 86.77% 29.98% 47.32% 40.50% 38.97%
0.55142117 0.61376299 0.47962125
Beta 9 8 0.85970235 0.48997051 5
standard deviation 0.39871030 0.33409775 0.22103498 0.20555183
(annualized) 5 0.30945782 2 9 7
0.83157342 1.28899609 1.63993621 1.68918955
Sharpe ratio
2.06969519 8 9 1 2
1.49651270 0.41927731 0.50093000 0.73980632 0.72393792
Treynor
6 2 2 6 3
0.79545665 0.22422107 0.38426512 0.33604673 0.32133786
Jensen's Expected Return 6 8 4 3 4

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Conclusion
It is important for the fund managers to check how the funds are performing annually compared to other
comparable funds. Sometimes fund managers over perform the market which means it earns more than
benchmark (market) and sometimes underperform which is just the opposite.

It has been seen that in 2016 the chosen 5 mutual funds (EBL NRB MUTUAL FUND, IFIC 1st Mutual
Fund, 1st Janata Bank Mutual Fund, NLI 1st Mutual Fund, The Southeast Bank 1st Mutual Fund) have
outperformed when they were managed passively but in 2017 they performed better when managed
actively.

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References

 Analysis of investment & Management of Portfolios by Reilly Brown

 Modern Portfolio Theory and Investment analysis by Edwin J. Elton
 www.dec.org
 www.bb.org
 http://www.dsebd.org
 https://www.icb.gov.bd/mutual_fund

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