Abstract
The paper investigates the behavior of mutual funds and their risk-adjusted performance in the financial markets of Nigeria between April 2016 and May 31, 2019, using descriptive statistics, as well as CAPM, Jensen’s alpha, and other risk-adjusted portfolio performance measures such as Sharpe and Treynor ratios, as well as Fama decomposition of return. The descriptive tests revealed that 80.77% of the funds were superior to market returns, while 13.46% were riskier. The market and the fund returns behaved abnormally with asymptotic and leptokurtic characteristics as their skewness and kurtosis varied from the normal requirements. Diagnostically, the normality test by Jacque-Berra showed that the return was not normally distributed at a 1% significance level. The market was more aggressive relative to the funds. The average risk-free rate was 6.75% above the market’s return. The risk-adjusted portfolio returns measured by Sharpe and Treynor ratios showed that 67.31% of the funds underperformed the market compared to 40.38% that outperformed the market using Jensen’s alpha. Fama decomposition of return revealed that the fund managers are risk-averse with 48% superior selection ability and rationally invested over 85% of investors’ funds in schemes with fixed income securities at a given risk-free return that cushioned the negative effects of the systematic and idiosyncratic risks and consequently threw the total returns into positive territories. Overall, the fund managers possessed 52% of inferior selection abilities that only earned 33% of superior risk-adjusted returns and hence, failed to achieve the desired diversification in the relevant period.
Highlights
Mutual funds are pools of funds from a stratified set of investors, invested in diversified characteristic-based securities, and professionally managed by fund managers to satisfy the risk-return preference of the investors at a reduced cost
In the Nigerian financial market, there are 28 mutual fund managers licensed by the Securities and Exchange Commission (SEC) to manage 94 funds stratified into 9 different mutual schemes as of May 31, 2019
The study In the Nigerian capital market, there are 28 muused descriptive statistics to test the statistical behav- tual fund managers licensed by the Securities ior of the historical weekly data sets such as mean, and Exchange Commission (SEC) to manage 94 standard deviation, variance, covariance, beta, al- funds stratified into 9 different schemes as of May pha or intercept, correlation coefficient, coefficient of 31, 2019
Summary
Mutual funds are pools of funds from a stratified set of investors, invested in diversified characteristic-based securities, and professionally managed by fund managers to satisfy the risk-return preference of the investors at a reduced cost. The investors’ awareness of the trends in mutual funds investing and their importance to diversify risk to stimulate retail investors’ participation in the market is low in Nigeria (Ugwoke & Onyeanu, 2013) This could be ascribed to no proven evidence of superior risk-adjusted returns, professionalism in funds management, superior selection and risk and returns prediction abilities, and non-transparency of expense ratio. It was found that those fund managers lacked the On the other hand, Kong et al (2019) examined desired selective ability and timing skills to out- the 80% of diversified mutual funds in Ghana It perform the market on a risk-adjusted return basis. It perform the market on a risk-adjusted return basis. was concluded that the money market funds perHowever, evidence from the Nigerian equity mar- formed better than the mixed and equity funds. ket is scanty and mixed. Oduwole (2015) examined mutual funds in Nigeria from December 2011 to Overall, the majority of the findings did not asNovember 2014 and found that the benchmark re- cribe the performance of the various mutual funds turn was superior to mutual fund scheme returns. to the fund managers’ selecting and timing abiliUsing Sharpe and Treynor ratios and Jensen’s alpha ties but can be largely attributed to the time frame, to evaluate the performance of 37 mutual funds the state-of-the economy, and the effects of the difspanning across six broad portfolio classes traded ferent transmission mechanism channels on the on the Nigerian Stock Exchange, Ilo et al (2018) various fund schemes
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
