TOPIC OF RESEARCH

Performance Evaluations of Pakistani Mutual Funds

Submitted By:

Malik Ali Amir SP13-MBA-005

Hassam Ishtiaq SP13-MBA-020

Mutti-ul-Hasnain SP13-MBA-032

Mohsin Rasheed Raja SP13-MBA-034

Muddasar Naseer Abbasi SP13-MBA-036

Supervisor and Instructor:

Mr. Dr Khalid Sohail

Faculty of Management Sciences

MBA-6
Department of Management Sciences
COMSATS Institute of Information Technology, Islamabad
Applied Portfolio and fund management

Table of Contents
Performance Evaluations of Pakistani Mutual Funds...................................................................................0
ABSTRACT....................................................................................................................................................2
INTRODUCTION...........................................................................................................................................3
TYPES OF MUTUAL FUNDS:..........................................................................................................................4
1. Open-end fund................................................................................................................................4
2. Close-end fund.................................................................................................................................4
OBJECTIVE OF STUDY :.................................................................................................................................4
SIGNIFICANCE OF STUDY:.............................................................................................................................5
LITERATURE REVIEW:...................................................................................................................................5
METHODOLOGY:..........................................................................................................................................7
HYPOTHESIS:................................................................................................................................................7
VARIABLE AND SOURCES OF DATA:..............................................................................................................8
The Sharpe Ratio:....................................................................................................................................8
Jensen differential model:.......................................................................................................................8
Treynor Measure:....................................................................................................................................9
ANALYSIS AND DISCUSSIONS:......................................................................................................................9
Treynor ratio..........................................................................................................................................10
Sharp Ratio............................................................................................................................................10
Sortino.......................................................................................................Error! Bookmark not defined.
Jensen Alpha..........................................................................................................................................11
Information Ratio...................................................................................................................................11
CONCLUSIONS:..........................................................................................................................................11
LIMITATIONS:.............................................................................................................................................11
REFERENCES:.............................................................................................................................................12

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ABSTRACT

T
he following paper on ‘Performance Evaluation of mutual funds’ provides an
overview of the mutual fund industry in Pakistan during January 2012-january 2015.
The research has tried to answer the questions which inquire about the rates of return
with respect to the mutual funds and the ability of fund managers in minimizing the
associated risks. For the study, six mutual funds have been chosen. The paper discusses four
different performance evaluation models Sharpe ratio, Trey nor measure, Information Ratio and
Jensen Alpha. Worldwide these models are being used for evaluating the performance of mutual
fund. This paper discusses how these models can help investors make better investment

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decisions. The mutual fund industry of Pakistan is still a growing industry but the industry has
great potential. Investment in mutual funds is a better investment option because mutual funds
are less risky and provide greater returns. The use of only three year data acts as a limitation of
this study. The study has given certain implications for the performance of mutual funds in
Pakistan.

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Introduction:

“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 mutual fund can
generate profits from three different sources, which are 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 and it also mobilizes
savings by attracting funds from small investors.

At present there are forty-three open-ended and twenty-two close-ended funds offered in the
market. All mutual funds in Pakistan are registered and legally established in the format of a
trust, under the trust act of 1882. These mutual funds are regulated by the Security Exchange
Commission of Pakistan (SECP) which licenses each asset management company in strict
compliant with the NBFC rules, 2003.

Mutual funds basically are of two types, open ended and close ended. The open ended mutual
funds are created on a continuous basis and can be bought and redeemed though management
companies. The funds are bought and redeemed at the prevailing Net Asset Value (NAV). Open-
ended funds cannot be traded in the secondary market. On the other hand close-ended funds have
a fixed number of shares. These shares once bought can be traded in the secondary market (stock
exchange) at the market rate. The market rate is announced daily by the stock exchange. The net
asset value (NAV) is per unit cost of acquiring a mutual fund the NAV can help determine the
performance of a mutual fund. The net asset value (NAV) is the value at which the mutual funds
are bought or sold in the market. The Mutual funds have better returns than the stock market
returns. The work of Jenson Michal (1967), Trey nor (1965) and Shape (1966) have proposed
different methods of evaluating the performance of mutual funds. These instrument help identify
the risks and returns of a mutual fund. In another study by Theodore Prince and Frank Bacon on
performance evaluation of mutual funds have analyzed the performance of mutual funds against
the stock market as a benchmark. The performance of mutual funds is import to both the investor
and fund manager. It can be considers as the main attraction to investor.

The present study is a short study on the performance evaluation of mutual funds of Pakistan. In
this study ten mutual funds from that will be examined to determine the performance evaluation
of mutual funds. The funds under consideration are open-ended funds. The reason for using an
open-ended fund is that an open-ended fund cannot be traded in the secondary market this
eliminates the bias of market information on the prices of the funds. Also for the investing
purpose the results will show more transparency. The mutual funds will be evaluated against the
stock market KSE 100 index as the benchmark.

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Types of mutual funds:

Funds can be characterized as ‘Open’ or ‘Close’ End Mutual

1. Open-end fund
Open-End funds continually issue new units and redeem outstanding units upon investor request.
The unit holders buy units of the fund or may redeem them at the published Net Asset Value
(NAV). Typically, these funds have a perpetual lifespan.The asset management company
launches the fund and continues toremain the counter party in the sale and purchase transactions
with the unit holder.
In Pakistan there exists 43 open ended mutual funds (as of 2014-15) including National
Investment (Unit) Trust (NIT) in the public sector and Atlas Income Fund, Crosby Dragon Fund
and Faysal Balanced Growth Fund.

2. Close-end fund
In Closed-End funds, a fixed number of share certificates are issued by the fund the shares trade
in the secondary markets (stock markets). Market price of the share certificates is determined by
their demand and supply and they do not necessarily trade at NAV. Though many of these funds
have a perpetual lifespan, others have a finite lifespan. The asset management company launches
the fund and no longerremains the counter party in the sales and purchase transactions with the
unit holder.

Objective of study:

 The objective of the research is to study and analyze the awareness level of investors of
mutual funds.

 To measure the satisfaction level of investors regarding mutual funds.

 To get insight knowledge about mutual funds
 To know the mutual funds’ performance levels in the present market
 To analyze the comparative study between other leading mutual funds in the present
market.
 To know the awareness of mutual funds among different groups of investors.

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Significance of study:
 This project report provides information about the future of mutual funds industry as well
as increase the awareness in people about mutual funds.
 The first part of report explain the history of funds how the funds are performing in the
market and how the mutual funds are performing in the current market situation as a
result what may be the future of this industry
 This study also facilitates the general people who can understand the importance and
explore the new option for investment.

Literature review:
Different researchers have different approach about mutual funds. National and international
researches have shown keen interest in the study of mutual funds. There are a variety of studies
present on mutual funds and the industry. Broadly the researchers conducted on mutual funds
pertain to the growth analysis, risk analysis and performance evaluation of mutual funds. These
researches are of interest to investors and asset management companies since they depict certain
behaviors of the funds. Among areas of study concerning mutual funds, performance evaluation
studies are most important. The financial performance of a fund tells investors as to what returns
a mutual fund generates along with the associated risks. The performance evaluating of the
mutual funds provides an opportunity to access the performance of the fund as to what
percentage returns can be realized and what are the risks.

According to this article by (Sheikh) the impressive performance of Islamic mutual funds in
Pakistan, strives to discuss the theoretical problems in screening principles followed in
investment policy. The paper concludes with the recommendation that in the short term, Shariah
regulators must comprehensively train themselves in prevalent financial reporting standards and
understand their implications. In the medium to long term, centralized Shariah board and revised
financial reporting standards must be structured taking into account special needs of auditing the
fulfillment of Islamic principles in practice.
In this paper Prajapati and Patel in( 2011) evaluated the performance of Indian mutual funds is
carried out through relative performance index, risk-return analysis, Treynor's ratio, Sharp's ratio,
Sharp's measure, Jensen's measure, and Fama's measure. The data used is daily closing NAVs.
The source of data is website of Association of Mutual Funds in India (AMFI). The study period
is 1st January 2007 to 31st December, 2011.
This article by Razzaq, Gull, Sajid, Mughal and Bukhari (2011) investigate the
performance and ability of funds managers by the help of different models, such as sharp ratio,
Trenyor ratio, Jensen’s Alpha and information ratio. First returns are calculated than ratios are
estimated, where the results represent that Islamic funds have significant growth in previous
years which indicate that in Pakistan Islamic funds are growing and investor are attracted by
these funds. To check the performance of Islamic mutual funds we have first calculate the
average monthly returns, net asset value and market index value.

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The main objectives of this research work by Narayanasamy, Rathnamani ( 2013) is to

analyse the financial performance of selected mutual fund schemes through the statistical
parameters such as (alpha ,beta, standard deviation, Sharpe ratio) . The findings of this research
study will be help full to investors for his future investment decisions. This study mainly
focused on the performance of selected equity large cap mutual fund schemes in terms of risk-
return relationship.
The study by Nafees, Shah and Khan (2011 ) is about evaluating the performance of close and
open end mutual funds in Pakistan. It provides guidance to the investors on how risk-adjusted-
performance evaluation of mutual funds can bedone and how they can use performance analysis
at the time of investment decision making. This research considered both close and open end
funds. The risk adjusted performance of both types of mutual funds has been measured through
traditional measures such as Sharpe measure, Sortino measure, Treynor measure, Jensen
differential measure and information measure. Secondary data has been used for performance
evaluation.. The results of all measures indicate that mutual fund industry is below as compared
to market portfolio performance. Risk adjusted performance results of mutual funds depict
negative risk adjusted returns to investors. The probable reason for negative risk adjusted returns
of mutual fund industry can be setback by global financial crisis to the market during sample
period.
This paper by Babar, Nawaz and Ashraf ( 2013) evaluate and compare the performance of
different categories of Pakistani mutual funds, during seven year from 2004 to 2011.Mutual
funds’ performance were analyzed using various evaluation techniques; Sharpe, Treyno, Jensen’s
alpha, Sortino, Information/Appraisal ratio, Fama overall performance and performance
attribution analysis. The findings suggest that performance of the mutual funds measured with
first five methods, does not satisfy investors’ expectations based on the risk and return, mutual
funds significantly under-perform the market. Those mutual funds analyzed with the last two
methods, are not offering complete diversification thus managers fell short of matching
expectations consistent with the actual risk level of portfolio, they have also not made active
decision involving both in allocation of assets and in selection of individual security.

This paper by Ahmad, Roomi and Ramzan (2015) is based on the comparison of Pakistani
open-ended and close-ended mutual funds performance. That study focus on income, balance
and equity schemes of open-ended and close-ended mutual funds. The performance of these
funds evaluates using Sortino measure, Shrape measure, Treynor measure, Jenssen differtial
measure and Inforamtion measure. KSE (market portfolio) performance is grater over the all
sample base mutual funds. Most risk adjusted funds returns are negative, which probably due to
mutual fund industry set back by financial crisis during sample period.

This article by Ali and Qudoos (2012) has been undertaken to investigate the performance of
mutual funds in Pakistani context. The research has tried to answer the questions which inquire
about the rates of return with respect to the mutual funds and the ability of fund managers in
minimizing the associated risks. For the study, fifteen mutual funds have been chosen for the
period of 2005 to 2009. The measures used for the evaluation of mutual funds are Sharpe and
Treynor measures. The results have been analyzed statistically by means of standard deviation.
The findings of the study show that the performance of mutual funds is not up to the mark in
Pakistan..

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This article by Mahmud and Mirza (2011) evaluate the performance of Pakistan’s mutual fund
industry during 2006–10, a period characterized both by bullish and bearish markets. An analysis
of fund types reveals that Islamic funds have shown strong growth in spite of their lackluster
performance compared to conventional funds. Income funds appear to have suffered as a
consequence of the underdeveloped bond market, and very high t-bill rates have resulted in
negative excess returns during the period. For stock funds, market indices and size are significant
factors that indicate a preference for large-cap stocks of managers. With consistently negative or
insignificant alphas, no fund manages to outperform the market.
This article by DHANDA, BATRA and ANJUM (2012) describes that Mutual Fund is a vehicle for
small investors to enter into companiesMutual fund companies collect the savings of the investors and
make a big corpus of these savings and invested in a well-diversified portfolio of different companies. It
is generally believed that mutual funds are able to diversify the risk. Mutual fund industry has just four
decades old in India. During this short span of time it has made tremendous growth. So considering these
points this paper is an attempt to study the performance evaluation of selected open ended schemes in
terms of risk and return relationship. For this rate of return method, Beta, Standard Deviation, Sharpe
ratio and Trey nor ratio has been used.BSE-30 has been used as a benchmark to study the performance of
mutual funds in India. The study period has been taken from 1st April 2009 to 31st March 2011.The
findings of the study reveal that only three schemes have performed better than benchmark

Methodology:
We have taken 10 open ended funds as a sample and took monthly data of Net Asset Values from
31 December 2012 to 30 December2015.We have used Sharpe, Trey nor, Sortino, Information
and Jensen Alpha measure to check the performance of these portfolios. We move with following
questions to find actual results.

Hypothesis:

H0: The return of mutual funds is not greater than average market return.

H1: The return of mutual funds is greater than average market returns.

H0: Mutual Funds are fully diversified to eliminate systematic risk.

H2: Mutual funds are not diversified and carry systematic risk.

Variable and sources of data:

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To evaluate the performance evaluation of mutual funds in the following research five models
are being considered (1) Sharpe ratio presented by William F. Sharpe (1960) (2) Trey nor
measure presented by Trey nor 1965, Jensen Differential presented by Jensen Michal (1969)
Information Ratio and sortino.

Ten mutual funds of js cash fund, js growth fund, abl income fund, alpha ghp cash fund, hbl
income fund, alfalah ghp alpha fund, Al-meezan mutual fund, askari allocation fund,
alfalah ghp multiplier fund, alfalah ghp value fund. have been selected for this research.
These funds are open-ended funds. The data collected for this research are the mutual fund
returns and NAV values for a three year monthly period from January 2012 to January 2015. The
mutual fund data was collected from MUFAP. The data of KSE 100 index because the company
considers the KESC 100 index as the benchmark and 12 month Treasury bill returns were
collected from the Security Exchange Commission of Pakistan (SECP).

The Sharpe Ratio:

The Sharpe ratio was introduced in 1960 by William F. Sharpe. The model is a ratio of the
difference between funds average return and the risk-free return divided by the standard
deviation of the fund. The model helps identify which portfolio offers the most favorable
risk/returns. Based on the ratios the funds with the highest ratio will then be selected for
investment. To compute this ratio we will be using data of historical return of the fund. The six
month Treasury bill return and standard deviation of the fund return.

Sharpe ratio = Rp – RF

σp

 Rp = the observed average fund return;

 Rf = the average risk free return;
 δp = the standard deviation of fund returns

Jensen differential model:

The Jenson differential model was introduced in 1969. The differential is alpha (α) that is the
difference between actual average return earned by the portfolio and the return that should have
been earned by the portfolio given the market conditions and the risk of the portfolio. The fund’s
returns should be higher than the risk free rate of return. A positive alpha is the indicator that the
fund has outperformed the market proxy. To calculate the Jensen differential we will be using the
six month Treasury bill, the historical returns of the portfolio, the returns on the market index and
Beta of the portfolio.

Jensen measure is calculated as follows:

αp = Rp – [ Rf + βp (Rm – Rf)]

 Rp = the observed returns of the portfolio

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 Rf = the risk free returns.

 Rm = the return on the market index.
 β= Beta of the Protfolio.
 α = parameter of the model.

Treynor Measure:
Trey nor model was introduced in (1965). The model consists of two type’s risks systematic and
unsystematic risk. Systematic risk is the risk which cannot be diversified. This risk is the beta of
the portfolio. A portfolio return depends on the beta. The systematic risk is uncertainty attached
with specific company and can be diversified.. The model measures the mangers ability to
produce returns taking into account the systematic risk of the portfolio. For treynor measure we
will use the historical returns of the funds, the six month Treasury bill returns and Beta of the
portfolio.

Trey nor Ratio = (Rp − RF)

 Rp = the observed average fund return.

 RF = the average risk free return.
 β = coefficient as a measure of systematic risk.

Analysis and discussion:

Al- FALAH ASKARI HBL INCOME AL FALAH GHP AL MEEZAN

GHP CASH ALLOCATION FUND FUND ALPHA FUND MUTUAL
FUND FUND
Treynor -0.0147 -0.0244 0.0064 0.0006
-0.0383
Rank 8 5 6 2 4
Sharp -0.2394 -0.1056 -0.03640 -0.0324
0.0032
Rank 7 6 4 3 2
Sortino -0.3046 -0.1310 -0.3643 -0.0408 0.0034
Rank 7 5 9 3 2
Jensen A -0.0111 -0.0139
lpha -0.0117 0.0067 -0.0072
Rank 8 10 9 1 3
Information -0.5164
Ratio -0.8276 -1.1684 -0.2768 -0.3506
Rank 6 5 10 1 3

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ABL AL FALAH GPH AL FALAH JS CASHFUND JS GROWTH

INCOME MULTIPLIER GHP VALUED FUND-A
FUND INCOME FUND FUND

Treynor -0.1480 -0.0377 0.0164 -0.0893 0-0023

Rank 10 7 1 9 3
Sharp -0.3161 -0.2474 -0.0572 -0.5690 0.0130
Rank 9 8 5 10 1
Sortino -0.2487 -0.0791 -0.4973 0.0166
-0.3060

Rank 8 6 4 10 1
Jensen -0.0085 -0.0087 -0.0012 -0.0078
alpha -0.0097
Rank 5 6 2 7 4
Information -0.9114 -0.3855 -1.1392 -0.2988
ratio -0.8933

Rank 7 8 4 9 2

Trey nor ratio:

Trey nor ratio measures how much excess returns a fund has generated relative to the market risk
it is exposed to

Three of our fund gives positive ratios as per market risk.

AL-Ghp Valued Fund gives the highest ratio (0.0164) of return than the risk in the market which
is still lower than the bench mark (0.022). No mutual fund is performing well.

Sharp Ratio:
Sharpe ratio measures how much excess returns a fund has generated relative to the total risk it is
exposed.
only two of the funds give positive ratio against the risk fund is facing.js growth fund (0.0130)
performs best in all of mutual funds. Which is very less than bench mark (0.8974)

Sortino:
The Sortino ratio, on the other hand, only includes the downside deviation. This means only the
volatility that produces fluctuating returns below a specified benchmark is taken into
consideration

Only two funds are efficient against risk. And they gives excessive return than the minimal
acceptable return.

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Jensen Alpha:
measure either portfolio is able to get excess returns over what was expected or not able to meet expected
returns. Jensen alpha with negative values failed to meet expected return which is calculated based on
CAPM. Positive Jensen Alphas produce more than was expected
Only AL FALAH GHP ALPHA FUNDis able to earn more then what was expected using CAPM. All other
funds have earned less than the standard, so the values of Jensen Alpha are negative.

Information Ratio:
In contrast to the Sharpe, Sortino ratio, the information ratio uses the standard deviation of active
returns as a measure of risk instead of the standard deviation of the portfolio.

None of our return gives a positive return according to the risk of the standard deviation.

Conclusion:
Portfolio managers were not able to earn more than market. So we accept our H0 hypothesis
based on our actual results.

H0: The return of mutual funds is not greater than average market return.

Portfolio managers were not able to eliminate systematic risk and not able to fully diversify risk
because they would abe then many ratio results would come zero. But only one fund has
performed a better then benchmark that isAL Falah ghp Fund. So we accept hypothesis:

H2: Mutual funds are not diversified and carry systematic risk.

Other two hypotheses are rejected based on our research results.

Limitations:
We have compared every portfolio with KSE-100 index which is like comparing oranges with
mangoes for some funds like money market funds. Results can be better accurate if proper
benchmarking is used.

Target returns we used in our study is market return or risk free rate of return. But funds
managers set target returns after considering so many things. So again here we used proxy which
may biased the results.

Refrences:
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Bacon, T. P. (n.d.). Analyzing Mutual Fund Performance Against Established Performance

Benchmarks: A Test of Market Efficiency . Research in Business and Economics Journal
.

Investoprdia. (n.d.). Investopedia. Retrieved from

http://www.investopedia.com/terms/i/informationratio.asp

Mehmood, F. (n.d.). linkedin. Retrieved from https://www.linkedin.com/pulse/study-

performance-evaluation-mutual-funds-farhan-farooq?
trkSplashRedir=true&forceNoSplash=true

Shah and Hijazi, 2. (2005). Performance Evaluation of Mutual Funds in Pakistan. Performance
Evaluation of Mutual Funds in Pakistan, 14.

Investoprdia. (n.d.). Investopedia. Retrieved from

http://www.investopedia.com/terms/i/informationratio.asp

Mehmood, F. (n.d.). linkedin. Retrieved from https://www.linkedin.com/pulse/study-

performance-evaluation-mutual-funds-farhan-farooq?
trkSplashRedir=true&forceNoSplash=true

Shah and Hijazi, 2. (2005). Performance Evaluation of Mutual Funds in Pakistan. Performance
Evaluation of Mutual Funds in Pakistan, 14.

http://mufap.com.pk/pdf/WRMF.pdf

http://www.slideshare.net/kalashsh/mutual-funds-in-pakistan

http://www.scribd.com/doc/31412111/Mutual-Fund-in-Pakistan-Types-and-Performance

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