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International Research Journal of Finance and Economics

ISSN 1450-2887 Issue 36 (2010)


© EuroJournals Publishing, Inc. 2010
http://www.eurojournals.com/finance.htm

An Evaluation of the Attributes Considered by Investment


Professionals in Selecting Mutual Funds: The
Case of Turkey1

Onur Gözbaşı
Erciyes University, Faculty of Economics and Administrative Sciences, Turkey
E-mail: onurgozbasi@gmail.com
Tel: +90-352-4374937/30111; Fax: +90-352-4375239

Levent Çıtak
Erciyes University, Faculty of Economics and Administrative Sciences, Turkey
E-mail: lcitak@erciyes.edu.tr
Tel: +90-352-4374937/30111

Abstract

Over the past decade Turkey has been catching up with the developments in the
global mutual fund industry. Using conjoint analysis, this study investigates the relative
importance of the attributes considered by Turkish portfolio managers and investment
advisors in selecting mutual funds. It also investigates how the levels of these attributes are
valued. The findings indicate that the attributes that matter the most are listed in their order
of importance as expense ratio, past performance and experience of the fund manager.
While the affiliation of the fund and size of the fund appear to be of moderate importance,
it is found that investment advisors and portfolio managers attach even less importance to
the number of funds managed by a particular founder and the fund manager’s investment
style. In the mutual fund industry with increasing diversification and competition, the
results of the study is expected to contribute to the process of structuring the funds
managed by founders and to offer an insight to individual investors in their mutual fund
selection.

Keywords: Mutual Fund Selection, Portfolio Manager, Investment Advisor, Conjoint


Analysis.
Jel Classification Codes: G20, G11

1. Introduction
Becoming increasingly competitive, the mutual fund industry has lately been growing dramatically
with a more complex structure and increasing diversification. Therefore, determining the salient
characteristics of mutual funds demanded by investment professionals are of great importance for the
mutual fund founders when introducing new funds and structuring the funds under their management.
Furthermore, identifying such characteristics might guide small investors in their investment decisions.
This paper aims to evaluate the attributes that portfolio managers and investment advisors consider

1
This study is a revised version of a paper presented at the 11th National Finance Symposium in Turkey.
International Research Journal of Finance and Economics - Issue 36 (2010) 181

when selecting a mutual fund and to determine the relative importance of these attributes as well as
their preferences at the levels forming these attributes. To this end, following Ramasamy and Yeung
(2003), this study uses the conjoint analysis.
Mutual funds could be defined as financial institutions channeling smaller savings into financial
markets in an organized manner and allowing all kinds of investors to convert their savings into
investment with different combinations of risk and return. Anderson and Ahmed (2005: 1) attribute the
popularity of mutual funds to the following factors: (1) easy purchase and sale of fund participation
certificates (2) opportunities for smaller investments (3) professional services (4) professional portfolio
management (5) availability of mutual funds with a variety of investment objectives (abundance of
investment alternatives relative to expectations of risks and returns). Since Massachusetts Investment
Trust, the first mutual fund in its modern sense established in 1924, the global mutual fund industry has
witnessed an enormous progress. The total asset value of mutual funds around the world amounted to
26.13 trillion dollars by the end of 2007 (Appendix 1).

Table 1: Mutual Funds in Turkey

Mutual Funds in Turkey


Net Asset Value
Number of Mutual Funds Number of
Year (Thousand Turkish Lira)
Investors
A Type* B Type Total A Type B Type Total
1987 - - - 0 53 53 N/A
1998 96 101 197 71.879 275.185 347.064 N/A
2000 145 121 266 520.294 1.417.318 1.937.611 N/A
2002 134 108 242 434.884 8.911.788 9.346.672 N/A
2004 123 130 253 780.370 23.663.404 24.443.774 2.632.462
2005 126 149 275 1.033.635 28.340.487 29.374.122 2.959.573
2006 126 163 289 831.518 21.180.058 22.011.576 2.470.909
2007 129 168 297 919.383 25.461.778 26.381.161 2.998.454
2008 126 209 335 596.212 23.376.136 23.972.348 2.938.904
*Mutual funds in Turkey are subject to a classification: Mutual funds with at least 25% of the portfolio value made of the
shares of the firms established in Turkey form the A Type and others constitute the B Type.
Source: Capital Markets Boards of Turkey, December 2008 Monthly Statistical Bulletin

While the legal arrangements concerning the mutual funds in Turkey were enacted in 1981 with
the Capital Markets Board Law, the first mutual fund was founded in 1987 by a private bank. Since
then, mutual funds in Turkey have experienced a considerable increase in terms of their numbers,
types, and net asset value (Table 1). Furthermore, the introduction of private pension funds into the
system from 2003 onwards could be considered as a remarkable development regarding the growth of
institutional investments in Turkey. By December 2008, the number of participants in the private
pension system rose to 4.97 million persons, and the portfolio size of the existing 121 pension funds
rose to 6.04 billion Turkish Lira (Capital Markets Board of Turkey, 2008).
182 International Research Journal of Finance and Economics - Issue 36 (2010)
Figure 1: Distribution of Global and Turkish Mutual Fund Assets According to Fund Type

WORLD TURKEY

0,9 0,9
0,8 0,8
0,7 0,7
0,6 0,6
0,5 0,5
0,4 0,4
0,3 0,3
0,2 0,2
0,1 0,1
0 0
Equity Funds Money Market Bond Funds Balanced/Mixed Others Equity Funds Bond Funds Balanced/Mixed Funds Liquid Funds
Funds Funds

Source: ICI 2007; TKYD 2007 p. 8.

On the other hand, a comparison with global statistics reveals that mutual fund industry in
Turkey lags behind many of the developing countries in terms of portfolio size. As demonstrated by
the figures in Europe, Turkey is only ahead of countries such as Slovakia, Romania and Russia, which
have only recently experienced a transition into market economy (Appendix 1). Moreover, examining
the distribution of the types of mutual funds in the world and Turkey (Figure 1), it could be suggested
that Turkey failed to achieve a proper fund diversification in terms of the types of mutual funds. By the
end of the year 2006, the distribution of mutual fund values according to the types of mutual funds
around the world was 48% for equity funds, 18% for bond funds, 18% for money market funds, 10%
for balanced-mixed funds, and 6% by others, whereas the same distribution in Turkey was as follows:
81% for liquid funds, 15% for bond funds, 3% for equity funds, and 1% for balanced-mixed funds.
Another important characteristic of Turkish mutual fund sector is the overwhelming importance of
commercial banks as founders of mutual funds (Appendix 2). In this context, the study differs from
other studies in the literature in that it identifies the attributes that professionals consider when
selecting mutual funds in a market with different characteristics than those in the other parts of the
world in general.
The remainder of the article is as follows. The section 2 provides information about conjoint
analysis and offers a literature review to determine the attributes considered important in the selection
of mutual funds and their levels. The section 3 describes the study design and data collection method,
while the section 4 includes the study results and evaluations. In this study, we gave priority to the
research methodology over the literature review. We treat them under the same section, because the
literature on mutual fund selection has been examined particularly to determine the factors used in
conjoint analysis. Furthermore, attribute levels separately identified for each factor will largely be
based on the reviewed literature and the variables of Turkish investment fund market. Thus, it is
deemed appropriate to present the objective of using conjoint analysis firstly and then to treat literature
review, factor selection, and factor levels as a whole.

2. Research Methodology and Literature Review for Attribute Identification


This study uses conjoint analysis with a view to investigate the attributes taken into consideration by
the portfolio managers and investment advisors in mutual fund selection in Turkey. Conjoint analysis
is a method of identifying consumer preferences for the features of a particular good or services that
determine its demand. The method is usually used as a market research instrument to improve effective
product design by determining the order of importance for the factors that consumers consider as
significant when purchasing a product. Conjoint analysis helps not only to identify which attributes of
a product are relatively significant or insignificant for consumers but also to determine which level of
each attribute is the most or least preferred. For instance, assuming that the three important attributes in
the decision to buy a mobile phone include price, standby time (the time that is needed to recharge the
battery) and dimensions, these three attributes are the factors to be taken into consideration in the
conjoint analysis. Thus, factor levels include different price ranges, different standby times (for
International Research Journal of Finance and Economics - Issue 36 (2010) 183

instance, 1. 100-150 hours, 2. 151-200 hours, 3. longer than 200 hours) and different dimensions,
respectively. Conjoint analysis can be applied to any problem of choice, and allows estimating
preference decisions both for each individual respondent and for all respondents.
Another advantage of this type of analysis is that respondents reveal the order of importance for
certain attributes and their preferences at various levels by scoring or rating product or service profiles
within certain attributes. In other words, the respondents are not given a list of the product or service
attributes and not asked to rate them by their order of importance; rather, they are asked to rate or score
product or service profiles with different combinations of attribute levels. Thus, respondents are faced
with a purchasing decision similar to a real-life decision (Ross et al., 2003: 230). Instead of
independently evaluating product or service attributes, respondents assess a product or service
including combinations of different levels of all attributes. An assessed combination may also consist
of various features considered when buying a financial product (Moskowitz; Krieger, 2001: 344).
Most commonly employed as a marketing research instrument, conjoint analysis has various
areas of use such as industrial products, transport services and financial services marketing. Related to
financial decision making, Hooper (2001) uses conjoint analysis to determine the importance of factors
that affect international capital budgeting decisions by multinational corporations. Murphy and Souter
(2004) use conjoint analysis to survey the attributes that influence individual investors when they make
a decision to buy shares. Ramasamy and Yeung (2003) investigate the importance of factors
considered important in the selection of mutual funds in Malaysia.
In applying the conjoint analysis, “full-factorial” conjoint design, which consist of the use of all
combinations of attribute levels (all possible levels of all attributes), makes it impossible for
respondents to thoroughly evaluate all profiles simultaneously. For example, there are 243 possible
combinations (35 = 3x3x3x3x3) for 5 attributes with three levels for each. Due to its high cost and the
difficulty for respondents in thoroughly evaluating so many combinations, researchers often prefer
“fractional factorial” design (Kuhfeld et al., 1994: 546). Therefore, the number of profiles that could be
thoroughly assessed by respondents in a conjoint analysis is usually determined by the “fractional
factorial” design.
Selection of a mutual fund with high return at a tolerable risk level could be considered as a
complex process, because there are many factors that affect mutual fund selection (Ramasamy and
Yeung, 2003:123). A review of literature reveals that the mostly considered criterion in assessing a
mutual fund is “past performance”. Many studies have examined the effects of the past performances
of mutual funds on their future performance.2 Grinblatt and Titman (1992) demonstrated that the past
performance of 279 funds in the period between 1974 -1984 constituted a sound reference for the
future. Goetzman and Ibbotson (1994) analyzed 728 mutual funds in the US for the period between
1976- 1988 to arrive at a similar result. Carhart (1997) and Brown and Goetzman (1995) also obtained
partially similar results in their studies. Ramasamy and Yeung (2003) found that past performance was
the most significant attribute considered by Malaysian investment advisors in selecting mutual funds.
In contrast, Philpot et al. (1998) examined bond mutual funds and observed that the past performance
of these funds can not estimate future performance. This study investigates the three levels identified
for the attribute of “fund’s past performance” and the following growth preferences of managers:
steady growth, impressive growth or supernormal growth (Table 2).
Various expenses of mutual funds are transferred to fund investors. The expense ratio (the ratio
of total expenses to net asset value), is a meaningful criterion used in inter-fund comparisons and is
usually referred to in academic studies (Madura, 2006: 661). It could be suggested that mutual funds
with high expense ratios can not usually yield sufficient returns to meet this ratio. Consequently, many
analyses on the expenses of mutual funds have found a considerably negative relationship between the
expense ratio and fund performance (Haslem, 2003: 317). Carhart (1997), and Grinblatt and Titman

2
A quite comprehensive study examining the literature on the past performance of investment funds was published in 2002
by SIRCA (Securities Industry Research Centre of the Asia Pacific) under the title “A Review of the Research on the Past
Performance of Managed Funds”. For access
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/FMRC_Report.pdf/$file/FMRC_Report.pdf
184 International Research Journal of Finance and Economics - Issue 36 (2010)

(1989) underline the reverse relationship between mutual fund performance and expense ratio. Blake,
Elton and Gruber (1993) recommend bond fund investors to prefer funds with low expense ratios. For
the European mutual funds, expense ratio and age are found to be negatively related to risk adjusted
performance by Otten and Bams (2002). Rompotis (2008) finds that the expenses negatively affect
Greek mutual fund performance. The present study identified three levels (<3%, 3%-10%, > 10%) for
expense ratio, calculated as “Total Expenses/ Average Fund Size”. These levels are identified by
examining the 2006 expense ratios for Turkish mutual funds, given in Appendix 3 and Appendix 3-A.
One possible problem in mutual fund selection is the question of whether the performances of
large and small funds are different. Using the data for the period 1975-1984 and Jensen’s criterion,
Grinblatt and Titman (1989) demonstrated that small mutual funds have a better performance than the
large ones. Despite the view that large mutual funds yield high performance as additional information
about them is accessible through further research and investors incur lower expenses due to their
volumes (sizes), it is argued that small-scale funds may exhibit superior performance largely because
of their flexible structures and their intolerance to high operation costs for diversification (Haslem,
2003: 273–275). In this study, the number of circulating participation certificates (CPC) is used to
represent the attribute of “fund size” considered in mutual fund selection. Three levels that form the
attribute (CPC< 100 million, 100 million<CPC< 500 million and CPC> 500 million) are identified by
examining the numbers of circulating participation certificates for Turkish mutual funds, which are
provided in Appendix 4.
Obviously, the performance of a mutual fund mainly depends on the quality of the mutual fund
manager. Therefore, it could be argued that there is a need to disclose to the public the explanatory
information about the mutual fund managers. On the issue, Chevalier and Ellison (1999) examined the
relationship between certain characteristics of fund managers and fund performance, and found that
factors such as the age or MBA degree of fund managers may lead to differences in mutual fund
performance. Shukla and Sign (1994) find that portfolio manager’s professional education may result
in superior fund performance. In developed countries, chiefly in the US, there are institutions that
provide investors with data on mutual fund managers (See Morningstar 2007). However, to the best of
our knowledge, there are no efforts made to this end in Turkey. Assuming that portfolio managers and
investment advisors have such information about mutual fund managers to determine whether they
would consider such information in fund selection, we chose to include in our analysis the attributes of
“investment style of fund manager” and “fund manager’s experience”. To ascertain whether qualitative
and quantitative characteristics of mutual fund managers do affect fund selection, we evaluate the
attribute “fund manager’s experience” at three levels and “investment style of fund manager” at two
levels, as seen in Table 2.
An examination of the market shares of Turkish mutual fund founders reveals that occupying
the top ten positions among 67 fund founders, commercial banks hold the bulk of the market with a
total share of 84.2% (Appendix 2). Thus, corporate personality of fund founders can be considered in
mutual fund selection. The attribute “fund founder” was included in the analysis at three levels so as to
assess the effect of the corporate personality of a fund founder on mutual fund selection. Turkish
mutual fund industry exhibits diversity in terms of the number of funds managed by fund founders.
While particularly the founders such as Türkiye Iş Bankası, Akbank and Garanti Bankası with
relatively high market shares manage more then ten funds, not more than one fund is managed by
founders such as Öncü Menkul Değerler A.Ş. and Halk Yatırım Menkul Değerler A.Ş. (Appendix 2).
Therefore, as observed in Table 2, the attribute “the number of funds managed by the fund founder” is
analyzed at three levels in order to determine whether fund selection is affected by “the number of
funds managed by a mutual fund founder”.
Consequently, seven attributes that may, in our opinion, be considered in mutual fund selection
are identified through literature review and expert opinion; and as seen in Table 2, three levels for each
of the six attributes and two levels for one attribute are identified to be used in fractional factorial
design.
International Research Journal of Finance and Economics - Issue 36 (2010) 185
Table 2: Attributes in Mutual Fund Selection and their Levels

Attributes Attribute Levels


Steady growth in the last 5 years
A- Fund’s Past Performance Impressive performance during the last year
Supernormal growth in the last 3 years
0-3 years
B- Fund Manager’s Experience 4-7 years
More then 7 years
Cautious
C- Investment Style of Fund Manager
Aggressive
Small (CPC <100 million)
D- Fund Size Medium (100 million< CPC <500 million)
Large (CPC >500 million)
Bank
E- Fund Founder Intermediary Institution
Insurance Company
1
F- Number of Funds Managed by the Fund Founder between 2-10
more than 10
lower than 3%
G-Expense Ratio of the Fund between 3% - 10%
higher than 10%

3. Conjoint Design and Data Collection


Investment style of fund manager consists of two levels, while each of the remaining six attributes of
three levels (Table 2). Thus, considering all attribute levels, the possible number of profiles is
3x3x2x3x3x3x3 = 1458. As respondents cannot possibly rate 1458 mutual fund profiles, “fractional
factorial design” was performed using SPSS 15.0, which gave the optimal number of profiles as
eighteen. Four holdout profiles were also included in the questionnaire and rated by the respondents.
Respondents were not informed about which profiles were holdout profiles. Although they are rated by
respondents, holdout profiles are not used by the conjoint method to estimate the utility scores but they
constitute a control criterion for the validity of the utility scores for the real profiles. Table 3 presents
our pre-expectations for the relationship between the rated score and the direction of the level preferred
by respondents in the attributes.

Table 3: Model Description

Attribute Number Expectations about the Relationship between the Rated Score
of Levels and the Direction of the Level Preferred in the Attributes
Fund’s Past Performance 3 No definite direction expectation
Fund Manager’s Experience 3 An Expected Positive Relationship (Greater Experience
Receiving Higher Scores)
Investment Style of Fund Manager 2 No definite direction expectation
Fund Size 3 An Expected Positive Relationship (Larger Funds Receiving
Higher Scores)
Fund Founder 3 No definite direction expectation
Number of Funds managed by the Fund 3 An Expected Positive Relationship (Funds with a Higher Number
Founder of Funds Managed by the Founder Receiving Higher Scores)
Expense Ratio of the Fund 3 A Negative Positive Relationship (Funds with Low Expense
Ratios Receiving Higher Scores)
186 International Research Journal of Finance and Economics - Issue 36 (2010)

Data Collection
In the study, for data collection, professional fund managers employed in Intermediary Institutions,
Portfolio Management Companies and Private Pension Companies in Turkey were asked to rate on a
website 22 fund profiles identified by “fractional factorial design” in a range of 1-10 (Appendix 5). To
this end, top-level executives employed in 18 portfolio management companies and 11 private pension
companies were contacted via telephone. To contact the portfolio managers and investment advisors
employed in intermediary institutions, we resorted to the Association of Capital Market Intermediary
Institutions of Turkey (TSPAKB). Thereupon, TSPAKB informed its members about our research via
public letter Nr. 509 on its website. In the end, 47 portfolio managers and/or investment advisors
participated in our study. Of the respondents 49% are employed in portfolio management companies,
32% in intermediary institutions and 19% in private pension companies. 28% of the respondents are
female, and 75% have an experience of more than 5 years in their current positions.

4. Research Findings
The conjoint analysis revealed the order of relative importance attached by portfolio managers and
investment advisors to the seven attributes included in the model as well as the order of preference for
the attribute levels. Furthermore, the analysis also revealed the number of respondents scoring in the
same and reverse directions to our expectations about the rated score and the direction of the level
preferred in the attributes. The results of the analysis also provide information about the individual
order of importance and the order of preference for the attribute levels for each respondent. However,
as we aimed to evaluate as a whole the order of importance and preferences for the factors considered
by portfolio managers and investment advisors in mutual fund selection, we have evaluated the
statistical data concerning the entire model. Table 4 presents the correlation coefficients and
significance levels for the entire model.

Table 4: Coefficients of Correlations between the Observed and Estimated Preferences

Correlation Coefficient Probability


Pearson R 0,976 0,000
Kendall Tau 0,826 0,000
Kendall’s Tau for Holdouts 0,667 0,087

Pearson’s R and Kendall’s Tau correlation coefficients are used to measure the power of
estimation performance concerning the importance values attached to the attributes and the preferential
priority (utility estimations) for attribute levels. A high performance between the estimated values and
observed values for preferences indicates a good estimation performance. When the number of model
parameters and the number of rated profiles are close to each other, the correlation between the
observed and estimated scores might be artificially increased. In such cases, correlation coefficients for
holdout profiles can better indicate the model fit. It is always the case that the correlation coefficients
calculated for holdout profiles are lower than the correlation coefficients of real profiles (SPSS, 2005:
34–35). As indicated by Table 4, the correlation between the observed and estimated preferences was
high considering both types of correlation coefficients. The statistically significant coefficient values of
0.976 and 0.826 are a sign of a good estimation power for the model. Moreover, the correlation
coefficient computed for the holdout profiles is also very high and statistically significant at a
significance level of 10%.
International Research Journal of Finance and Economics - Issue 36 (2010) 187

4.1. Relative Performance Attached to the Attributes by Portfolio Managers and Investment
Advisors
The scores rated by 47 portfolio managers and investment advisors for 22 fund profiles were subjected
to conjoint analysis, which revealed the relative importance values for the seven attributes believed to
be considered in mutual fund selection (Figure 2).

Figure 2: Importance Values of Considered Attributes in Mutual Fund Selection

25

20 G
A

15
B

10
E

5 C D F

0
Etkenler

Attributes Importance Values


A- Fund’s Past Performance 21,67932 (2)
B- Fund Manager’s Experience 16,42188 (3)
C- Investment Style of Fund Manager 7,594218 (7)
D- Fund Size 8,37847 (5)
E- Fund Founder 13,02499 (4)
F- Number of Funds Managed by the Fund Founder 8,3535 (6)
G- Expense Ratio of the Fund 24,54762 (1)

Importance values are expressed in percentage and the sum of values is 100%. Importance
values represent the degree of effectiveness on preference of the attributes considered in mutual fund
selection. The figures given in parentheses next to the importance values represent the order of relative
importance for the attribute in question. Evidently, of the 7 attributes included in the model, the most
valued attribute in fund selection was the expense ratio of the fund with a percentage of 24.55%. The
second most valued attribute is the past performance of the mutual fund. Although high returns
previously yielded by mutual funds are not usually regarded as a guarantee for high future returns by
investment professionals, the respondents believe that past performance is also a considerably
important attribute in mutual fund selection.
The importance values show that the third attribute in order of importance is fund manager’s
experience. The fourth and the fifth attributes are the institutional founder of mutual fund and fund size
represented by the number of circulating participating certificates, respectively. It could be suggested
that the portfolio managers and investment advisors attach a medium degree of importance to the
institutional founder and fund size when selecting a mutual fund. Figure 2 shows that the last two
attributes to which portfolio managers and investment advisors attach the least importance are the
number of funds managed by the fund founder and the investment style of the fund manager. Since in
Turkey a portfolio manager or an investment advisor in the process of mutual fund selection can not
188 International Research Journal of Finance and Economics - Issue 36 (2010)

possibly obtain information about the investment style unless they personally know the founder of the
mutual fund, it is quite natural for the attribute in question to be the least important one among all
seven attributes.
Our study is inspired by the work of Ramasamy and Yeung (2003). To the best of our
knowledge, their study is the only attempt to employ the conjoint analysis to determine the importance
of factors in the selection of mutual funds. To compare, for the first two attributes, the findings are
parallel to those of Ramasamy and Yeung (2003), who found past performance as the most important
factor followed by expense ratio in mutual fund selection for Malaysian investment professionals. On
the other hand, while Malaysian financial advisors attach greater importance to fund size (3rd of the 8
attributes) and the number of managed funds (4th of the 8 attributes), they turned out to be of moderate
importance (5th and 6th of the 8 attributes) for Turkish professionals. In contrast, Turkish professionals
attach greater importance to fund managers’ experience and affiliation of the fund in the 3rd and the
4th ranks, respectively; however, Malaysians found these attributes relatively less important in the 5th
and the 6th ranks.
What is most striking in both studies is that the investment style of fund managers is thought to
have very little significance, contrary to the case in the developed countries.

4.2. Evaluation of the Attribute Levels


Table 5 presents the utility estimations for the various levels of seven attributes included in the model.
For each attribute, the level with the highest utility estimation among the values of levels pertaining to
the attributes indicates the most preferred level, while the level with the lowest utility estimation
represents the least preferred level. For each attribute, the utility estimation of the level most preferred
by portfolio managers and investment advisors is shown in bold font. As they are expressed with a
common unit, utility estimations can be added to give the total utility for any combination of levels
(SPSS, 2005: 32). For instance, the total utility of (a) a large mutual fund with (b) steady growth in the
last 5 years, (c) a fund manager with an experience of more than 7 years, (d) an aggressive investment
style adopted by their managers, (e) a bank as a founder, (f) more than 10 funds managed by their
founders, and (g) an expense ratio lower than 3% is calculated by adding the constant and the utility
estimations shown in bold fonts in Table 5:
The total utility of such a fund is (0.522 + 1.809 + 0.073 + 0.335 + 0.061 + 0.585 – 1.076 +
6.158 =) 8.467.
The utility estimations for the various levels of “past performance of the fund”, which is the
second most valued attribute by portfolio managers and investment advisors in mutual fund selection,
indicates that steady growth is considered as most important (utility estimation = 0.522) level. To put it
another way, the steady growth of a mutual fund in the last 5 years contributes most to the total utility
of the mutual fund according to the investment professionals in terms of past performance. Mutual
funds with supernormal growth in the last three years are the second preferred fund type (utility
estimation = 0.109), while the least preferred mutual funds are those with impressive performance
during the last year (utility estimation = -0.630). These results demonstrates that portfolio managers
and investment advisors more commonly prefer the funds that yield medium-level but steady returns in
the long run, when compared to the mutual funds which yield high returns only during the last year or
yield supernormal returns in recent years.
International Research Journal of Finance and Economics - Issue 36 (2010) 189
Table 5: Utility Scores of Considered Attributes in Mutual Fund Selection

Utility Standard
Attributes Attribute Levels
Estimation Error
Steady Growth in the last 5 years 0,522 0,126
A- Fund’s Past Performance Impressive Performance during the last year -0,630 0,126
Supernormal Growth in the last 3 years 0,108 0,126
0-3 years 0,603 0,109
B- Fund Manager’s Experience 4-7 years 1,206 0,219
More then 7 years 1,809 0,328
C- Investment Style of Fund Cautious -0,073 0,095
Manager Aggressive 0,073 0,095
Small (CPC <100 million) 0,112 0,109
D- Fund Size Medium (100 million< CPC <500 million) 0,223 0,219
Large (CPC >500 million) 0,335 0,328
Bank 0,061 0,126
E- Fund Founder Intermediary Institution -0,063 0,126
Insurance Company 0,001 0,126
1 0,195 0,109
F- Number of Funds Managed
between 2-10 0,390 0,219
by the Fund Founder
more than 10 0,585 0,328
lower than 3% -1,076 0,109
G-Expense Ratio of the Fund between 3% - 10% -2,152 0,219
higher than 10% -3,229 0,328
Constant 6,158 0,448

The utility estimations for the levels of the attribute “fund manager’s experience” demonstrate
that the mutual funds managed by fund managers with longer experience would be more commonly
preferred. It is found that the funds managed by fund managers with an experience of longer than seven
years are the most preferred by portfolio managers and investment advisors (utility estimation = 1.809).
An increase in the duration of the experience of a fund manager causes a parallel decline in the
preferability of a fund (utility estimations = 1.206 and 0.603).
The utility estimations for the levels of the attribute “investment style of the fund manager” indicate
that the mutual fund’s aggressive managers will be more commonly preferred than those with cautious
managers. Preference of the funds managed by mutual fund managers who are willing to take risks could be
interpreted as indicating that portfolio managers and investment advisors perceive a positive relationship
between risk and expected returns. It could be argued that, as they tend to purchase the mutual funds
managed by risk-loving fund managers, portfolio managers and investment advisors also prefer to take risks
with an expectation for high returns.
Among the levels of the attribute “fund size” represented by the number of circulating participation
certificates, the highest utility estimation belongs to the larger mutual funds (utility estimation = 0.335), and
utility estimation decreases with decreasing fund size, which points out to the fact that portfolio managers
and investment advisors tend to prefer larger funds when selecting mutual funds.
The attribute “fund founder” ranked the fourth among the seven attributes. Table 5 indicates
that among the utility estimations for the attribute “fund founder”, the highest value of 0.061 belongs to
the banks, which is followed by the utility values of insurance companies and intermediary institutions.
Consequently, it could be argued that portfolio managers and investment advisors most commonly tend
to purchase the participation certificates for the mutual funds established by banks. This could be
interpreted as indicating that, although many banks were liquidated and the banking system shrank
following the 2001 crisis in Turkey, banks still remain as the most trusted financial institutions for
investment professionals thanks to the introduction of foreign banks into the restructured system
through partnerships and merges.
190 International Research Journal of Finance and Economics - Issue 36 (2010)

An examination of Table 5 reveals that, among the levels of the attribute “the number of funds
managed by fund founders”, the mutual funds with fund founders managing more than 10 funds have
the highest utility estimation (utility estimation = 0.585). It is also observed that utility estimation
decreased in parallel with a decrease in the number of funds managed by the fund founder. This
indicates that portfolio managers and investment advisors tend to prefer more commonly the mutual
funds with fund founders managing a greater number of funds.
Among the seven attributes included in the model, the utility estimations for the attribute
“expense ratio”, which is shown to be the most valued attribute by portfolio managers and investment
advisors, indicate that utility estimations decrease with increasing expense ratios. Since the utility
estimations gets the highest for the expense ratio lower than 3%, mutual funds with low expense ratios
tend to be preferred more than those with higher expense ratios.
When the utility estimations of the level values for all attributes are examined as a whole,
portfolio managers and investment advisors tend to prefer (a) large mutual funds with (b) steady
growth in the last 5 years, (c) the longest manager experience, (d) an aggressive investment style
adopted by their manager, (e) bank as a founder, (f) the highest number of funds managed by their
founders and (g) the lowest expense ratios.
We had pre-expectations about four of the seven attributes in the model as indicated in Table 3.
Here are the number of respondents whose ratings are contrary to our expectations about the
relationship between respondent scores for the four attributes in question and the direction of the level
they preferred:
1) B- Attribute “Fund Manager’s Experience” = 4 (4 of 47 respondents tended to prefer
more the funds with less experienced managers).
2) D- Attribute “Fund Size” = 17 (17 of 47 respondents tended to prefer smaller funds).
3) F- Attribute “The Number of Funds Managed by the Found Founder” = 17 (17 of 47
respondents tended to prefer mutual funds with a fund founder managing fewer funds).
4) G- Attribute “Expense Ratio of the Fund”= 2 (2 of 47 respondents tended to prefer mutual
funds with higher expense ratios).
The scores of most of the respondents (43/47= 91% and 45/47= 96%) on the attributes “fund
manager’s experience” and “expense ratio of the fund” confirmed our expectation. The scores of a
considerable majority (30/47 = 64%) on the attributes “fund size” and “the number of funds managed
by the fund founder” also confirmed our expectations. The preferences of a group of 36% who tends to
prefer smaller funds and mutual funds with founders managing fewer funds could be attributed to the
concerns that growth might lead to management problems and high operation costs.

Conclusion
This study aimed to determine the attributes considered by Turkish portfolio managers and investment
advisors in mutual fund selection as well as the relative importance of these attributes. In the Turkish
mutual fund industry which has assumed a complex structure with increased diversification and
competition, it is important, in our opinion, to determine which attributes are prominent in the
preferred funds. As a matter of fact, having access to reliable information about these attributes will not
only assist restructuring of the current funds and the funds to be included in the system, but will also
indirectly offer insights to small investors in their selection of mutual funds.
The results of the study conducted through the participation of professional fund managers and
investment advisors employed in intermediary institutions, portfolio management companies and
private pension companies reveals that expense ratio of the fund is the most valued attribute, which is
followed by the attributes past performance and fund manager’s experience respectively. While the
institutional founder of the fund and fund size have medium level of importance, it is observed that
investment advisors and portfolio managers cares even less about the investment style of fund
managers. When the utility estimations for the attributes and their level values are examined as a
whole, the most preferred mutual funds are found to be large-scale mutual funds with a steady growth,
International Research Journal of Finance and Economics - Issue 36 (2010) 191

a relatively experienced manager with an aggressive investment style, the highest number of funds
managed by their founders, a bank as a founder and the lowest fund expense ratios.
The results obtained through the conjoint analysis are largely consistent with those in the
literature. Nevertheless, it is obvious that the performance of a mutual fund mainly depends on the
quality of a mutual fund manager. Yet, in our study, as well as in Ramasamy and Yeung’s (2003)
study, there is a lack of consideration on the part of professionals for the attribute investment style of
fund managers in contrast to the studies in the literature and our expectations, which might indicate
that public opinion is not adequately provided with explanatory information about the mutual fund
managers in emerging markets. Therefore, it is believed that Turkey shall benefit from the
establishment of institutions and similar rating systems that inform the public about mutual fund
managers, as is the case in developed countries. Nevertheless, investment professionals found the
investment style of fund managers as the least important attribute, while fund manager’s experience is
believed to be relatively and distinctly important. This is an interesting finding of the study. Ramasamy
and Yeung (2003) also obtained the same result, which may point to the need for a general rating
system for the fund managers in emerging countries. Furthermore, this study may guide institutions
that offer financial services in the use of conjoint analysis for new product design or restructuring of
current products.

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Appendıces
Appendix 1: Worldwide Total Net Assets of Mutual Funds (Millions of U.S. dollars, year-end)

2002 2003 2004 2005 2006 2007


World 11.324.128 14.048.311 16.164.795 17.771.027 21.807.505 26.129.564
Americas 6.776.289 7.969.541 8.792.450 9.763.921 11.469.062 13.421.149
Europe 3.462.999 4.682.836 5.640.452 6.002.261 7.803.906 8.934.864
France 845.147 1.148.446 1.370.954 1.362.671 1.769.258 1.989.690
Germany 209.168 276.319 295.997 296.787 340.325 372.072
Italy 378.259 478.734 511.733 450.514 452.798 419.687
Luxembourg 803.869 1.104.112 1.396.131 1.635.785 2.188.278 2.685.065
Netherlands 84.211 93.573 102.134 94.357 108.560 113.759
Romania 27 29 72 109 247 390
Russia 372 851 1.347 2.417 5.659 7.175
Slovenia N/A N/A N/A N/A 2.484 4.219
Spain 179.133 255.344 317.538 316.864 367.918 396.534
Sweden 57.992 87.746 107.064 119.059 176.943 194.955
Switzerland 82.622 90.772 94.407 116.669 159.515 176.282
Turkey 6.002 14.157 18.112 21.761 15.463 22.609
United Kingdom 288.887 396.523 492.726 547.103 755.156 897.460
Others in Europe 527.310 736.230 932.237 1.038.165 1.461.302 1.654.967
Asia and Pacific 1.063.857 1.361.473 1.677.887 1.939.251 2.456.511 3.678.330
Africa 20.983 34.460 54.006 65.594 78.026 95.221
Source: 2009 Investment Company Fact Book

Appendix 2: Market Shares of the Founders of Mutual Funds in Turkey

No Founder Net Asset Value (Turkish Lira) Market Share(%)


1 T.İş Bankası A.Ş. 4.412.795.358 20,34
2 Akbank T.A.Ş. 2.860.183.238 13,18
3 T.Garanti Bankası A.Ş. 2.736.574.572 12,61
4 Yapı Ve Kredi Bankası A.Ş. 2.095.989.033 9,66
5 Koçbank A.Ş. 1.766.322.832 8,14
6 T.C. Ziraat Bankası A.Ş. 1.310.853.335 6,04
7 Türkiye Vakıflar Bankası T.A.O. 1.001.137.473 4,61
8 HSBC Bank A.Ş. 828.291.198 3,82
9 Oyakbank A.Ş. 664.342.597 3,06
10 Türk Ekonomi Bankası A.Ş. 588.556.050 2,71
11-67 Others 3.432.614.757 16
Total 21.697.660.442 100
Source: Capital Markets Board of Turkey February 2007, Monthly Statistical Bulletin.
194 International Research Journal of Finance and Economics - Issue 36 (2010)
Appendix 3: Expense Sizes for All Mutual Funds in Turkey

Expense Type Amount (Turkish Lira) Percent


Export Permit Expenses 9.000,00 0,0008
Expenses of Registration and Announcement 173.852,00 0,0147
Insurance Expenses 0 0
Notary Expenses 125.213,00 0,0106
Independent Auditing Fee 2.291.166,00 0,1934
Publishing Expenses for Participation Certificate 3.496,44 0,0003
Deposit Fee 4.176.320,14 0,3526
Fund Management Fee 1.037.868.525,00 87,617
Stock Commission 10.282.360,00 0,868
Bond Commission 4.613.501,00 0,3895
Commission on Overnight Reverse Repo 22.137.838,00 1,8689
Commission on Short-Term Reverse Repo 3.426.494,00 0,2893
Commission on Money Market 487.242,00 0,0411
Commission on Foreign Securities 39.962,00 0,0034
Taxes and Other Expenses 98.309.059,00 8,2993
Other 607.367,00 0,0513
Total 1.184.551.385,58 4,5
Total Value of Average Funds within the Period 26.322.224.819,00 100
Source: Capital Markets Board of Turkey (2007a)

Appendix 3-A.: “Total Expenses / Average Fund Size” Ratio for Mutual Funds

33,00
27,00
% 21,00
15,00
9,00
3,00

1 20 39 58 77 96 115 134 153 172 191 210 229 248 267

2006 Total Expenses / Average Fund Size Ratio in Ascending Order

Source: Capital Markets Board of Turkey (2007a), http://www.spk.gov.tr/indexpage.aspx?pageid=278, (Accessed March


06, 2007)

Appendix 4: Tabulation for the Number of Circulating Participation Certificates

Value Count Percent Cumulative Percent


[0, 100.000.000) 209 53,45 53,45
[100.000.000, 500.000.000) 81 20,72 74,17
[500.000.000, 3.57e+010) 101 25,83 100,00
Total 391 100 100.00
International Research Journal of Finance and Economics - Issue 36 (2010) 195
Appendix 5: Questionnaire (Sample)

Please, rate the following fund profiles in the range of 1 to 10


Criterion Mutual Fund Profile 1 Mutual Fund Profile 2
Past Performance Supernormal growth in the last 3 years Steady growth in last 5 years
Fund Manager’s Experience More than 7 years 4- 7 years
Investment Style of Fund Manager Aggressive Cautious
Number of circulating participation
Number of circulating participation
Fund Size certificates between 100 million and 500
certificates < 100 million
million
Founder of Fund Bank Insurance Company
Number of Funds Managed by Fund
1 1
Founder
Expense Ratio (Total Expenses/
Between 3%- 10% Lower than 3%
Avarege Fund Size)
Your Score