Performance Appraisal of Asset Management Companies in Bangladesh
- Avijit Mallik
- Saad Niamatullah
- Swarup Saha
Mutual funds are a type of collective investment scheme where a large number of small investors pool their savings together and entrust it to an asset manager, who manages the capital to maximize returns in exchange for a management fee. While mutual funds and other collective investment schemes are popular in developed markets, with assets under management (AUM) to GDP ratio of 62% globally, they are yet to gain popularity in Bangladesh, where AUM-to-GDP ratio stands at only 0.53%. However, mutual funds and asset management companies have been growing at high rates, with 37 closed-end and 42 open-end funds now in operation, and there is enormous potential for growth in the mutual fund industry in Bangladesh. Since mutual funds are a new product in the Bangladeshi market, a detailed study was performed in order to distinguish skilled asset managers from unskilled asset managers. In this study, “skill” has been defined as the ability to beat the broad-market DSEX index on after-fee basis, with the underlying logic that managers - all of whom charge a management fee - should at least be able to beat a passive investment in the broad DSEX. For purposes of the study, the weekly NAV at market value was of 76 mutual funds managed by 16 asset management companies (AMCs) were collected. The weekly returns for the DSEX and each fund under consideration were calculated separately. Four well-known measures were used to rank each mutual fund utilizing the weekly returns. The measures were Jensen’s Alpha, the Sharpe Ratio, the Treynor Ratio and the Modigliani M2 Alpha ratio. For AMCs managing multiple funds, the measures were asset-weighted to calculate the measure for the AMC as a whole. Our findings illustrated that only 5 out of 16 AMCs managed to beat the DSEX index and earn an alpha over the benchmark. Our findings were in line with academic consensus which states that active management is a zero-sum game and that the majority of actively managed funds will underperform the index on an after-fee basis. Our recommendation is for AMCs to introduce passively-managed index funds which will at least keep up with the market return and minimize fees and trading costs.
- Michael ZhangEditorial Assistant