Mutual funds behavior and risk-adjusted performance in Nigeria

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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.

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    • Figure 1. Distribution of investment in mutual funds in Nigeria
    • Table 1. Fund managers, schemes, and net asset value as at May 31, 2019
    • Table 1 (cont.). Fund managers, schemes, and net asset value as at May 31, 2019
    • Table 2. Descriptive statistics of the mutual funds in Nigeria (April 2016 – May 2019)
    • Table 3. Risk-adjusted performance of the schemes in Nigeria (January 2016 – May 2019)
    • Table A1. Descriptive statistics of mutual funds in Nigeria (January 2016–May 2019)
    • Table B1. Risk-adjusted returns of mutual funds in Nigeria (January 2016–May 2019)
    • Table B1 (cont.). Risk-adjusted returns of mutual funds in Nigeria (January 2016–May 2019)
    • Table C1. Fama decomposition of mutual funds returns (January 2016–May 2019)
    • Table C1 (cont.). Fama decomposition of mutual funds returns (January 2016–May 2019)
    • Conceptualization
      Joshua Odutola Omokehinde
    • Data curation
      Joshua Odutola Omokehinde
    • Formal Analysis
      Joshua Odutola Omokehinde
    • Funding acquisition
      Joshua Odutola Omokehinde
    • Investigation
      Joshua Odutola Omokehinde
    • Methodology
      Joshua Odutola Omokehinde
    • Project administration
      Joshua Odutola Omokehinde
    • Resources
      Joshua Odutola Omokehinde
    • Supervision
      Joshua Odutola Omokehinde
    • Validation
      Joshua Odutola Omokehinde
    • Visualization
      Joshua Odutola Omokehinde
    • Writing – original draft
      Joshua Odutola Omokehinde
    • Writing – review & editing
      Joshua Odutola Omokehinde