PERFORMANCE EVALUATION OF 60 DANISH MUTUAL FUNDS - …



SUPERVISOR:MICHAELCHRISTENSEN

11 Spring

PERFORMANCEEVALUATIONOF60DANISH

MUTUALFUNDS

MICHAELVILLADSEN(286274)

U13BSC

AarhusSchoolofBusinessandSocialSciences

Abstract

In2011themarketvalueoftheDanishmutualfundsexceededDKK1200billion,investedby more than 835.000 people. Therefore, the performance by the mutual funds is of great interest to a large proportion of the Danish population, and along with the huge amount of moneymanagedbytheDanishmutualfunds,itisveryimportanttoshedlightonthereturns thatthemutualfundsareabletoobtain. Thepurposeofthisthesisisthereforetoprovideaperformanceanalysisof60Danishmutual funds in the period from 2001-2009. The analysis will cover three investment categories: Danishstocks,Europeanstocks,andGlobalstocks. Thetheoreticalframeworkofthethesisisbuildaroundthetheoryofefficientmarketsandthe Capital Asset Pricing Model. Consequently, the performance measurements used in the analysiswillfollowthesetheoriesaswell.Inordertoanalysetheperformanceofthemutual funds,relevantbenchmarkshavebeenchosen,andthepurposeofthethesisistoseewhether the mutual funds are able to outperform those benchmarks or not. The analysis will begin withtheJensenindex,howeverthisisasingleindexmodel,andthereforeitmightnotbeable toexplainallofthevariationinthereturnsofthemutualfunds.Therefore,theJensenindexis followed by a multi-index model, where 4 to 7 benchmarks are included, dependent on the investment category of the mutual funds. However, the Jensen index and the multi-index modelonlyfocusesontheselectionabilityofthefunds,andthereforeitisdesiredtoseparate theselectionandtimingabilitiesofthemutualfundsusingtheTreynor&Mazuymodel. The results from the analysis were that in the Jensen index, 23 funds underperformed the index,31fundsperformedneutrally,and6fundsoutperformedtheindex.Inthemulti-index model,thesenumberschangedto31,27,and2,respectively,therebyshowinganevenweaker performancebythemutualfunds. Taking an average of these two analyses would reveal that close to half of the mutual funds haveperformedsobadthattheyarenotabletocovertheirownexpenses.Thisshouldraise someconcernregardingtheworkdonebytheDanishmutualfunds. However,positiveaspectswerealsofoundintheanalysis,sincetwofundsshowedsignificant positiveperformanceinbothofthemodels.Thosefundsbeing"SEBinvestDanskeaktier"and "Valueinvest Danmark, Blue Chip" showing a monthly over performance of 0,3271% and

0,3376%, respectively. It must therefore be concluded that these funds have done their job reallywell. Finally,theTreynorandMazuymodelwasusedtoseparatetheselectionandtimingabilities ofthemutualfunds.Surprisingly,itwasdiscovedupthat8mutualfundsinvestinginDanish stocks showed significant timing abilities. However, for the remaining mutual funds, timing abilities were not present. None of the funds showing timing abilities showed significant positive selection abilities, and the result of that was that the values where decreased compared to the Jensen index. It should finally be noted, that none of the two previous best performingfundsshowedsignificanttimingabilities. The overall conclusion on the thesis is that one should be careful when selecting mutual funds. The reason of that is that the returns obtained by the mutual funds compared to relevant benchmarks differ a lot, and one would therefore earn significantly more money by choosingthebestfunds.Finally,itshouldbementionedthathighreturnsofamutualfundin one period does not guarantee high returns in the following period, and therefore the selectionofmutualfundsshouldnotsolelybebasedonpreviousreturns.

Tableofcontents

1.INTRODUCTION

1.1.PROBLEMSTATEMENT 1.2.DELIMITATION 1.3.THEORETICALFRAMEWORK

2.INVESTMENTFUNDSINDENMARK

2.1GENERALLYABOUTTHEINVESTMENTFUNDS 2.2LEGISLATION 2.3COSTS

3.THEORY

3.1EFFICIENTMARKETS 3.2CAPITALASSETSPRICINGMODEL(CAPM) 3.2.1CRITIQUEOFTHECAPITALASSETPRICINGMODEL(CAPM) 3.3RISKMEASUREMENTS 3.3.1SYSTEMATICRISK 3.3.2UNSYSTEMATICRISK 3.4PERFORMANCEMEASUREMENTS 3.4.1JENSEN'SALPHA 3.4.2CRITIQUEOFJENSEN'SALPHA 3.4.3MULTI-INDEXMODEL 3.4.5MARKETTIMING

4.DATA

4.1CHOICEOFMUTUALFUNDS 4.2CHOICEOFBENCHMARKS 4.2.1INDEXMETHODOLOGY 4.2.2BENCHMARKFORTHEJENSENINDEX 4.2.3BENCHMARKFORTHEMULTI-INDEXMODEL 4.3CHOICEOFRISKFREERATE 4.4SURVIVORSHIPBIAS 4.5ASSUMPTIONSFORTHETESTS

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2 3 3

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8 10 12 14 14 15 16 18 19 21 23

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28 29 30 31 34 37 37 39

5.PERFORMANCEANALYSIS

5.1JENSEN'SALPHA 5.1.1DANISHSTOCKS 5.1.2EUROPEANSTOCKS 5.1.3GLOBALSTOCKS 5.1.4CONCLUSIONONJENSEN'SALPHA 5.2MULTIINDEXMODEL 5.2.1DANISHSTOCKS 5.2.2EUROPEANSTOCKS 5.2.3GLOBALSTOCKS 5.2.4CONCLUSIONONTHEMULTI-INDEXMODEL 5.3MARKETTIMING 5.3.1DANISHSTOCKS 5.3.2EUROPEANANDGLOBALSTOCKS 5.3.2CONCLUSIONONTHETREYNORANDMAZUYMODEL 5.4CONCLUSIONONTHEPERFORMANCEANALYSIS

6.DISCUSSIONANDREFLECTIONS

7.CONCLUSION

8.BIBLIOGRAPHY

APPENDIX1:JENSEN'SALPHA

DANISHSTOCKS RESULTS ASSUMPTIONS EUROPEANSTOCKS RESULTS ASSUMPTIONS GLOBALSTOCKS RESULTS ASSUMPTIONS

APPENDIX2:MULTIINDEXMODEL

DANISHSTOCKS

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45 46 47 48 50 51 51 52 54 56 57 57 58 59 60

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