CHAPTER 1 INTRODUCTION

Mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. Currently, the worldwide value of all mutual funds totals more than $26 trillion. In Pakistan the largest number of listed mutual funds, twenty six, is managed by the ICP. There are 11 closed-end mutual funds operating in private sector. Whereas NIT and ICP operate in public sector. The mutual fund industry is a lot like the film star of the finance business. Though it is perhaps the smallest segment of the industry, it is also the most glamorous in that it is a young industry where there are changes in the rules of the game everyday, and there are constant shifts and upheavals. The mutual fund is structured around a fairly simple concept, the mitigation of risk through the spreading of investments across multiple entities, which is achieved by the pooling of a number of small investments into a large bucket. Massachusetts Investors Trust (now MFS Investment Management) was founded on March 21, 1924, and, after one year, it had 200 shareholders and $392,000 in assets. The entire industry, which included a few closed-end funds, represented less than $10 million in 1924.The stock market crash of 1929 hindered the growth of mutual funds. In response to the stock market crash, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC helped draft the Investment Company Act of 1940, which sets forth the guidelines with which all SEC-registered funds today must comply. Today, however, mutual funds are highly specialized and offer almost unlimited diversity. The types of mutual fund portfolios available run the gamut from conservative to aggressive, from stocks to bonds, from domestic to international portfolios, from taxable to tax-free and from virtually no-risk money market funds to high-risk options funds.

The great variety of mutual funds available makes it possible to select a fund, or several funds, which precisely various types of funds and their primary objectives are described below. (They are arranged in order of increasing risk factors) Money Market Fund

We begin with a discussion of money market funds for several reasons: 1.They are the safest for the novice investor 2. They are the easiest, least complicated to follow and understand 3. Without exception, every mutual fund investment company offers money market funds 4. Money market funds represent indispensable investment tool for the beginning investor 5. They are the most basic and conservative of all the mutual funds available Money market funds should be considered by investors seeking stability of principal, total liquidity, and earnings that are as high, or higher, than those available through bank certificates of deposit. Income Funds

Objective of income mutual funds is to seek a high level of current income commensurate with each portfolio's risk potential. The risk / reward potential is low to high, depending upon the type of securities that make up the fund's portfolio. The risk is very low when the fund is invested in government obligations, blue chip corporations, and short-term agency securities. The risk is high when a fund seeks higher yields by investing in long-term corporate bonds, offered by new, undercapitalized, risky companies. Growth and Income Funds

The primary objectives of growth and income funds are to seek long-term growth of principal and reasonable current income. By investing in a portfolio of stocks believed to offer growth potential plus market or above - market dividend income, the fund expects to investors seeking growth of capital and moderate income over the long term (at least five years) would consider growth and income funds. Such funds require that the investor be willing to accepts some shareprice volatility, but less than found in pure growth funds.

Balanced Funds

The basic objectives of balanced funds are to generate income as well as long-term growth of principal. These funds generally have portfolios consisting of bonds, preferred stocks, and common stocks. They have fairly limited price rise potential, but do have a high degree of safety, and moderate to high income potential Growth Funds

Growth funds are offered by every investment company. The primary objective of such funds is to seek long-term appreciation (growth of capital). The secondary objective is to make one's capital investment grow faster than the rate of inflation. Dividend income is considered an incidental objective of growth funds Sector Funds

As was noted earlier, most mutual funds have fairly broad-based, diversified portfolios. In the case of sector funds, however, the portfolios consist of investment from only one sector of the economy. Sector funds concentrate in one specific market segment; for example, energy, transportation, precious metals, health sciences, utilities, leisure industries, etc. In other words, they are very narrowly based Specialized Funds

Specialized funds resemble sector funds in most respects. The major difference is the type of securities that make up the fund's portfolio. For example, the portfolio may consist of common stocks only, foreign securities only, bonds only, new stock issues only, over - the - counter securities only, and so on

1.1Risk Management and the Mutual Funds:

Risks are usually defined by the adverse impact on profitability of several distinct sources of uncertainty. While the types and degree of risks an organization may be exposed to depend upon a number of factors such as its size, complexity business activities, volume etc. The basic objective of a mutual fund is to provide a diversified portfolio so as to reduce the risk in investments at a lower cost. The mutual fund industry worldwide is based on this premise. Investors who take up mutual fund route for investments believe that their risk is

minimized at lower costs, and they get an optimum portfolio of securities that match their risk appetite. Although it is reduced considerably in mutual fund investing.

It's difficult to know which funds will outperform other funds at any given time. Market timers (people who move money around seeking the best performance) often discover they have bought into a fund at the height of its popularity. And, at that point, the price may go down. Knowing of potential risks in advance will help you avoid situations in which you would not be comfortable. Understanding the risk levels of the various types of mutual funds at the outset will help you avoid the stress that might result from a thoughtless or a hasty purchase. Let us now examine the risk levels of the various types of mutual funds.

Mutual funds face risks based on the investments they hold. For example, a bond fund faces interest rate risk and income risk. Bond values are inversely related to interest rates. If interest rates go up, bond values will go down and vice versa. Bond income is also affected by the change in interest rates. Bond yields are directly related to interest rates falling as interest rates fall and rising as interest rise. Income risk is greater for a short-term bond fund than for a long-term bond fund

Following is a glossary of some risks to consider when investing in mutual funds. Call Risk. The possibility that falling interest rates will cause a bond issuer to redeem or callits high-yielding bond before the bond's maturity date. Country Risk. The possibility that political events (a war, national elections), financial problems (rising inflation, government default), or natural disasters (an earthquake, a poor harvest) will weaken a country's economy and cause investments in that country to decline. Credit Risk. The possibility that a bond issuer will fail to repay interest and principal in a timely manner. Also called default risk. Currency Risk. The possibility that returns could be reduced for Americans investing in foreign securities because of a rise in the value of the U.S. dollar against foreign currencies. Also called exchange-rate risk. Income Risk. The possibility that a fixed-income fund's dividends will decline as a result of falling overall interest rates.

Industry Risk. The possibility that a group of stocks in a single industry will decline in price due to developments in that industry. Inflation Risk. The possibility that increases in the cost of living will reduce or eliminate a fund's real inflation-adjusted returns. Interest Rate Risk. The possibility that a bond fund will decline in value because of an increase in interest rates. Manager Risk. The possibility that an actively managed mutual fund's investment adviser will fail to execute the fund's investment strategy effectively resulting in the failure of stated objectives.

Market Risk. The possibility that stock fund or bond fund prices overall will decline over short or even extended periods. Stock and bond markets tend to move in cycles, with periods when prices rise and other periods when prices fall.

Principal Risk. The possibility that an investment will go down in value, or "lose money," from the original or invested amount.

Let us now examine the risk levels of the various types of mutual funds. 1.1.1 Low level Risks: Money market funds Treasury bill funds Insured bond funds 1.1.2 Moderate level Risks: Mutual funds considered moderate-risk investments may be found in at least the eight types categorized below. Income funds Balanced funds Growth and income funds Short-term bond funds (taxable and tax-free) Intermediate bond funds (taxable and tax-free) Insured government/municipal bond funds

 Index funds.

1.1.3 High level Risks: The types of funds listed below have the potential for high gain, but all have high risk levels as well. Aggressive growth funds International funds Sector funds Specialized funds Precious metals funds high-yield bond funds (taxable and tax-free) Commodity funds Option funds Mutual funds enjoy strength because of availability of professionals, ability to diversify, expertise to match investment with risk and large liquidity. An average investor is not well versed with the market, may not have access to adequate information or does not have time to acquire information and analyze it. By investing through a mutual fund, the investor is able to acquire the services of a team of professionals dedicated to the investment business at a very low cost. An investor normally invests small amount and cannot achieve an adequate level of diversification. An investor who wishes to invest small amount can do so by investing in mutual funds. Whereas such small investors are not entertained normally by the brokers. Here in this paper we will see that what are the risk management techniques used by the mutual fund companies and how their performance is effected by these techniques. This can make a single investor understand that he can get more profit if he invests in market through mutual fund companies.

CHAPTER 2 LITERATURE REVIEW

Najam Ali(2006)pointed out that Funds management is a process whereby we try to maximize gains for the investors while minimizing the risk exposure. We select those securities (equity and fixed income) in our portfolio which gives us desired level of return both in terms of capital appreciation and/or dividend income, depending upon your investment criteria.

The pool of funds is managed on behalf of the investors by a team of specialized individuals, commonly known as fund managers or investment advisors. One of the main differences is that Mutual Fund returns are tax-free returns whereas conventional investments in banks are subject to 10% withholding tax which means in real terms we get less than the quoted returns. He said about portfolio management as the art and science of making decisions about investment (asset) mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk vs. performance. Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and numerous other tradeoffs encountered in the attempt to maximize return at a given appetite for risk. (Najam Ali, 2006) Mr. Naim Sipra expressed his views about Mutual funds performance is one of the most frequently studied topics in investments area in most countries. The reason for this popularity is availability of data and the importance of mutual funds as vehicles for investment in the stock market for both individuals and institutions. Mutual funds generally provide three benefits to their investors. First, they reduce the risk of investing in the stock market by diversification. Second, they provide professional management by experts in the stock market. And third, by pooling of investment funds, they allow small investors to hold a diversified portfolio. While the first and third benefits of mutual funds have been generally accepted as real benefits, the second benefit of having access to financial expertise has been questioned extensively in finance literature. A vast amount of literature exists in finance on the topic of market efficiency that recommends passive investment and suggests that paying money to so-called investment professionals is a fools game. As evidence they have tested again and again the performance of these professionals, such as mutual funds, and found evidence to support their hypotheses of market efficiency. In finance that there is a direct relationship between risk and return: the higher

the risk, the higher is the expected return. It would make no sense to compare, for example, two funds where one fund only invests in government bonds while the other invests in a portfolio of stocks. Over a long period of time the stock fund would outperform the government bond fund because it is taking on more risk, and unless there is a higher expected return associated with it there would be no point in investing in that fund. Of course, there is no guarantee that the stock fund would outperform the bond fund in every time period, and that is what is meant by risk of that fund. (Naim Sipra, 2006) In another research it has been said that over the last twenty years the mutual fund industry has grown at an incredible rate, and this has naturally attracted a lot of attention from the academic and financial community. A great deal of attention has gone into both predicting mutual fund returns is how and if managers adjust their portfolios market risk in reaction to their own or the markets past returns. The estimates derived here indicate that twice as many funds increase than decrease their funds market risk in response to their own funds past positive returns. In a sense, managers who have recently seen high market adjusted returns tend to double down. However, while managers may respond in a variety of ways to their own funds past returns the data does not indicate that it makes any divergence to their expected four factor risk adjusted returns. In contrast, funds are about evenly split in their reaction to high overall market returns between those that increase or decrease their market risk exposure. However, while the response is evenly split the returns are not. Those that act as market return contrarians produce significantly better four factor risk adjusted returns than those using other strategies.

(Harry Mamaysky, Matthew Spiegel, 2004)

Although risk management has been a well-plowed field in financial modeling for more than two decades, traditional risk management tools such as mean-variance analysis, beta, and Value-atRisk do not capture many of the risk exposures of hedge-fund investment There is one lasting insight that modern finance has given us, it is the inexorable trade-off between risk and expected return; hence, one cannot be considered without reference to the other. Moreover, it is often overlooked that proper risk management can, by itself, be a source of alpha. This is summarized neatly in the old Street wisdom that "one of the best ways to make money is not to lose it."

Value at Risk is an estimate, with a predefined confidence interval, of how much one can lose from holding a position over a set horizon. Potential horizons may be one day for typical trading activities or a month or longer for port- folio management. The methods described in our documentation use historical returns to forecast volatilities and correlations that are then used to estimate the market risk. These statistics can be applied across a set of asset classes covering products used by financial institutions, corporations, and institutional investors (Andrew W. Lo, 2001) About risks associated with mutual funds Vikas Agarwal said It is well accepted that the world of financial securities is a multifactor world consisting of different risk factors, each associated with its own factor risk premium, and that no single investment strategy can span the entire "risk factor space." Therefore investors wishing to earn risk premium associated with different risk factors need to employ different kinds of investment strategies. Mutual funds typically employ a long-only buy-and-hold-type strategy on standard asset classes, and help capture risk premium associated with equity risk, interest rate risk, default risk, etc. However, they are not very helpful in capturing risk premium associated with dynamic trading strategies or spread-based strategies. The ability to hedge means that industry can decide on the amount of risk it is prepared to accept. It may wish to eliminate the risk entirely and can generally do so quickly and easily using the Mismanaging price risk means achieving greater control of either the cost of inputs, or revenues from sales, or both; planning for the future based on assured costs and revenues; and eliminating concerns that a sharply adverse move in a metal's price could turn an otherwise flourishing and efficient business into a loss maker. Hedging by trade and industry is the opposite of speculation and is undertaken in order to eliminate an existing physical price risk, by taking a compensating position in the futures market. Speculators come to the futures market with no initial risk. They assume risk by taking futures positions. Hedgers reduce or eliminate the chance of further losses or profits, while the speculators risk losses in order to make profits.

For the most part, hedging techniques involve using complicated financial instruments known as derivatives, the two most common of which are options and futures. these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative.

. Hedging can greatly reduce the exposure to price risk. It is an important marketing tool for establishing price while retaining considerable marketing flexibility. However, hedging does not guarantee a profit. The hedging decision must still take into account production costs and market outlook. Pricing indecision often leads to a do-nothing- until-forced-to-sell strategy, with the crop sometimes sold at low prices. (Vikas Agarwal and Narayan Y. Naik , 2004) Modern portfolio theory (MPI) states that the investment decision process can be separated into two independent processes. In one, investment professionals, such as mutual fund managers, specialize in constructing a variety of risky portfolios. In a second process, individual investors choose complete portfolios by combining the optimal risky portfolio, based on their risk tolerances, and the risk-free asset. Finance research has traditionally focused on the first part of the investment process, especially on identifying some risky portfolio that would be universally optimal for all investors. In the real world, however, the investment process is more complicated; in addition to risk and return, factors such as taxes and human capital must be considered. Because different investors face different constraints in their investment decisions, a risky portfolio that is universally optimal may be impossible to find. Investors are left to their own judgments when determining the proper risk level for themselves and constructing their own complete portfolios. But many individual investors may not be competent at these tasks. According to a 1994 survey by Merrill Lynch & Company, more than 80 percent of the respondents failed a test of basic finance knowledge (Merrill Lynch Financial Literacy Index Analysis 1994). For such reasons, Brennan (1995) argued that examining the investment decision process from the individual investor's perspective is a much needed area of research. We propose a model that assists an individual investor in determining an appropriate asset allocation and selecting mutual funds for a complete portfolio. Mutual funds provide diversification, divisibility, low transaction costs, record keeping, and professional management for the individual investor. These features have helped propel the popularity of mutual funds to historic heights in the past decade. The proliferation of mutual funds has made choosing the right funds a challenge to many investors. In response, many magazines and news services designed to assist investors in mutual fund selection have emerged. These sources provide performance statistics and fund attributes, such as information on fund managers, expense ratios, and

turnover, but an individual investor seldom has the time or the expertise to analyze the vast amount of data available on mutual funds. (Hakan Saraoglu and Miranda Lam Detzler , 2002) Edward said in his research that a fund manager can communicate the nature of exposures to major risk factors of this sort by specifying a portfolio of security market indexes that, averaged over the next two to four years. is likely to have exposures similar to those of the fund. Thus, a growth stock fund might specify that a U.S. growth stock index would be an appropriate benchmark for this purpose. Another fund might select a combination of indexes, with 5% in a money market index, 75% in a value stock index, and 20% in a non-U.S. stock index. Each fund manager provides a well-defined index or portfolio of indexes so that investors can be informed of the fund's likely future exposures to major sectors of the security markets. Investors must ultimately be responsible for understanding or making predictions about the risks associated with major market sectors, as well as the extent to which sectors are likely to move with one another. Much of this information is common to many funds and thus can be most efficiently provided to investors by third parties such as financial planners and database providers. In contrast, the manager of a mutual fund is in the best possible position to predict his or her intended future investment strategy and to choose a benchmark portfolio of indexes that best describes that strategy. (Edward I. Altman, 2005) Equity mutual funds that invest in derivatives have similar risk and similar net return performance in those that do not. Change in fund risk is negatively related to past performance, but derivatives allow funds to dampen these changes. Funds that invest in derivatives may have higher or lower risk than funds that do not invest in derivatives. Managers may use derivatives to affect intertemporal changes in the funds risk exposure, (Jiaping Qiu 2007)

CHAPTER 3 RESEARCH METHODOLOGY AND EMPIRICAL RESULTS

3.1 The Sample

After 2002, mutual fund industry in Pakistan has witnessed significant changes and growth in terms of private sector participation, divestment of public sector funds. At present we have 34 funds22 closed-ends, out of which 09 are the infant commenced in between 2003 and 2004 some of which emerged due to divestment and then merger of ICP funds while others are newly introduced. We have 22 open-end funds, out of these funds 10 funds are infant, which introduced in between 2003 and 2004. As we are concerned with survivorship bias controlled data, ICP funds which no more exist at the end of June 2004 and merged into other funds are excluded from the research sample and other funds which have life of two to three years have also been excluded from the evaluation. Rests of 22 funds out of total funds have lived a long life and still operative which serve our research purpose.

3.2 Sources of Data Annual reports of equity and balanced funds for the period from 2005 to 2010 have been used for data collection.five year data has been used because most of the mutual funds started their operations in 2004 and 2005 so in order to avoid and discrepancy in results we have used five year data. For this purpose different sources have been used; Asset Management Companies of the funds, Stock exchanges, SECP and internet. Data for Treasury bills rate was collected from Statistical Bulletins of State Bank of Pakistan.

3.3 Variables Variables picked for the performance evaluation of mutual funds are historical stock prices of funds, rerturns,number of shares outstanding, monthly returns of KSE 100 index. 5 year Treasury bill rates. Return of fund was calculated dividing return per certificate by opening net asset value per certificate. Return per share was calculated dividing fund income after taxes by total number of shares outstanding for the year. Net asset value per certificate was calculated by deducting total liabilities from total assets of the year or by taking shareholders equity. Return of

a fund may also be calculated dividing net income after taxes of a fund by opening net assets of the fund for that year.

3.4 Methodology and Empirical Results There are four models which are used worldwide for the performance evaluation of mutual funds (1) Sharpe Measure (2) Treynor Measure (3) Jenson differential Measure (4) Fama French Measure. We have used first three measures excluding Fama French Measure. The reason for not using Fama French Model is that for this model we needed data on book to market ratio for all companies listed at KSE from 2005 to 2010 which could not be made available.

3.4.1 Sharp ratio: In 1960 William F. Sharpe started to work on portfolio theory as thesis project. He introduced the concept of risk free asset. Combing the risk free asset with the Markowitz efficient portfolio he introduced the capital market line as the efficient portfolio line. The model given by Sharpe, 1 we can proceed further to use it for the determination of expected rate of return for a risky asset, which led to the development of CAPM capital asset pricing model. Through this model an investor can know what should be the required rate of return for a risky asset. The required rate of return has a great significance for the valuation of securities, by discounting its cash flows with the required rate of return. In order to determine which portfolio offering the most favourable risk/return trade-off, we compute the ratio of the historical returns in excess of the risk-free rate to the standard deviation of the portfolio returns. The portfolio offering the highest reward/risk ratio then is the only risky portfolio in which investors will choose to invest. Using average returns of the portfolio uses Sharpe ratio to measure ex-post portfolio performance. This model is used to measure the performance of a managed portfolio in respect of return per unit of risk. This ratio also measures the portfolio managers ability on the basis of rate of return performance and diversification by taking into account total risk of the portfolio. The Treynor Model Treynor introduced two types of risks. One risk is called Systematic risk which is associated with market and cannot be diversified away. However, this type of risk can by calculated through beta. Treynor says that portfolio expected return depend on its beta. The other type of risk

which he separated from systematic risk is unsystematic risk. Unsystematic risk is specific to a company. The uncertainty attached with the specific company can be diversified away. Treynor model is used to measure the performance of a managed portfolio in respect of return per unit of risk (systemic risk). In this way the mutual fund provides the highest return per unit of risk (systemic risk) will be preferred as compared to the fund provides low return per unit of risk. Treynor ratio uses Beta as a risk measure hence considers the Systematic risk. This ratio also measures the portfolio managers ability on the basis of rate of return performance and diversification by taking into account systemic risk of the portfolio. This ratio measures the historical performance of managed portfolio in terms of return per unit of risk (systemic risk). Jensen Differential Measure Jensen in 1969 introduced alpha () in the capital asset pricing model to measure the abnormal return of a portfoliothat is difference between the actual average return earned by a portfolio and the return that should have been earned by the portfolio given the market conditions and the risk of the portfolio.

CHAPTER4 DATA ANALYSIS AND DISCUSSION

RATIO ANALYSIS Performance evaluation against benchmark Figure 1 presents return and risk of the 22 mutual funds along with market return and risk. From the figure it is evident that return of none of the companies have positive which whereas market earning is 0.006326. all mutual fund companies have negative return and marker returns are high.AlMezaan fund has the highest risk associated with its portfolios which is 1.19. The volatility of Asian stock fund, Namco Balanced, Safe way mutual fund and Tri Star mutual fund have less volatility as compare to other. Golden Arrow,investic fund,mezaan balance stock fund has high volatility. Further, the almeezan fund has low risk as compare to market risk whereas Investce mutual fund has high risk as compare to market risk. FIGURE 1 Risk and return of portfolio
1.4 1.2 1 0.8 0.6 0.4 0.2 Al-Meezan Mutual Fund Asian Stocks Fund Ltd Atlas Fund of Funds BMA Principle Guaranteed Dominion Stock Fund Ltd Ist Capital Mutual Fund Ltd Golden Arrow Selected Investec Mutual Fund Ltd First Dawood Mutual Fund JS Growth Fund JS Value Fund Meezan Balance Fund Prudential Stocks Fund Ltd Pak Oman Advantage Fund Pakistan Strategic Fund Pakistan Premier Fund PICIC Energey Fund PICIC Growth Fund PICIC Investment.Fund Safeway Mutual Fund Tri-Star Mutual Fund Ltd 0 -0.2 market return beta risk of portfoilio return of portfolio

Treynor ratio Treynor model is used to measure the performance of a managed portfolio in respect of return per unit of risk (systemic risk). In this way the mutual fund provides the highest return per unit of risk (systemic risk) will be preferred as compared to the fund provides low return per unit of risk. Treynor ratio uses Beta as a risk measure hence considers the Systematic risk. This ratio also measures the portfolio managers ability on the basis of rate of return performance and diversification by taking into account systemic risk of the portfolio. This ratio measures the historical performance of managed portfolio in terms of return per unit of risk (systemic risk). This ratio indicates the excess of return with respect to systematic risk. Figure 2 indicate that Treynors ratio of Pak Oman mutual fund.pakistan premier fund and Al Meezan fund mutual is higher as compare to other companies and this indicates superior performance of the fund. So we use mezaan balance mutual fund as benchmark. The performance of prudential stock fund is poor as compare to benchmark.

FIGURE 2 Treynors ratio of mutual fund companies

10 8 6 4 2 BMA Principle Golden Arrow 0 -2 -4 -6 -8 treynor's ratio JS Growth Fund JS Value Fund PICIC Growth Fund

4.1.3. Sharpe Ratio In order to determine which portfolio offering the most favorable risk/return trade-off, we compute the ratio of the historical returns in excess of the risk-free rate to the standard deviation of the portfolio returns. The portfolio offering the highest reward/risk ratio then is the only risky portfolio in which investors will choose to invest. Using average returns of the portfolio uses Sharpe ratio to measure ex-post portfolio performance. This ratio indicates the excess risk with respect to total risk. The higher the Sharpe ratio the better the performance of the portfolio is considered to be. Fig 3 indicate that The sharpe ratio of all the companies are negative so sharpe ratio of mezaan balance is -0.026 which means performance of this company is good as compare to other companies whereas the Treynor ratio. So according to sharpe ratio mezaan balance is performing well as it is bench mark company. Benchmark. So Treynors ratio fund is performed well whereas Sharpe ratio indicate the direction in which fund manager has to change the portfolio structure. FIGURE 3
Al-Meezan Mutual Fund Asian Stocks Fund Ltd Atlas Fund of Funds BMA Principle Guaranteed Fund Dominion Stock Fund Ltd Ist Capital Mutual Fund Ltd Golden Arrow Selected Stocks Investec Mutual Fund Ltd First Dawood Mutual Fund JS Growth Fund JS Value Fund Meezan Balance Fund Prudential Stocks Fund Ltd Pak Oman Advantage Fund Pakistan Strategic Fund Pakistan Premier Fund PICIC Energey Fund PICIC Growth Fund PICIC Investment.Fund Safeway Mutual Fund Tri-Star Mutual Fund Ltd 0

-0.5

-1

-1.5

-2

Series 1

-2.5

-3

-3.5

-4

4.1.4. Jenses Alpha This ratio measures the ability of active management to increase returns above those that are purely a reward for bearing market risk. This ratio indicates the superior performance of the fund. The company whose Alpha is positive it mean that company is performing well. Fig 4 indicate that Alpha of benchmark is -0.010 which is negative its mean mezaan balance mutual fund is performing less then its desired expectations S value ,prudential stocks are the company whose alpha is positive and greater then benchmark. It means their performance is better then benchmark. On the other hand all other companies have negative alpha and if we see the Treynor and Sharpe ratio of this company they both are negative.

BMA Principle Guaranteed

Golden Arrow Selected

Pak Oman Advantage Fund

First Dawood Mutual Fund

Al-Meezan Mutual Fund

Investec Mutual Fund Ltd

Dominion Stock Fund Ltd

Prudential Stocks Fund Ltd

Pakistan Strategic Fund

PICIC Investment.Fund

Meezan Balance Fund

Safeway Mutual Fund

Asian Stocks Fund Ltd

Atlas Fund of Funds

PICIC Energey Fund

JS Growth Fund

JS Value Fund

PICIC Growth Fund

Ist Capital Mutual Fund Ltd

Tri-Star Mutual Fund Ltd

Pakistan Premier Fund

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4

jenses ratio

REGRESSION ANALYSIS The regression is a statistical tool that is used to find out the parameters. From the regression we want to know the performance of the mutual funds. In performance three things are included diversification, timing and selectivity of the mutual funds. From the regression table value of R square indicate the diversification of the mutual funds. If the value is the highest one it means the fund is more diversified then others and well diversify fund reduce the risk. Fig 6 indicate that R Square of PICIC investment is highest then benchmark and other companies. It means the risk of PICIC investment is more diversified from other. The value of R square of PICIC investment is 0.7605 and R Square of benchmark which is mezaan balance is 0.387.tri stock, Asian fund, and Safeway mutual fund has the lowest R square value which shows that their portfolios are not well diversified.

FIGURE 6
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Al-Meezan Mutual Fund Asian Stocks Fund Ltd Atlas Fund of Funds BMA Principle Guaranteed Dominion Stock Fund Ltd Ist Capital Mutual Fund Ltd Golden Arrow Selected Investec Mutual Fund Ltd First Dawood Mutual Fund JS Growth Fund JS Value Fund Meezan Balance Fund Prudential Stocks Fund Ltd Pak Oman Advantage Fund Pakistan Strategic Fund Pakistan Premier Fund PICIC Energey Fund PICIC Growth Fund PICIC Investment.Fund Safeway Mutual Fund Tri-Star Mutual Fund Ltd

R square

t-value in the regression table indicate the timing of the fund. The benchmark of timing is 1.96. if the value is greater then 1.96 it means the fund manager is taking decision on time and positive and significant market timing implies superior market timing abilities of fund managers. Fig 7 present a summary of the t values. PICIC investment has higher t value which shows ability of the fund manager to take timely decision. Whereas t-values for all types of funds are negative demonstrating a lack of timing ability among fund managers.

4 2 0 -2 -4 -6 -8 -10

Al-Meezan Mutual Fund Asian Stocks Fund Ltd Atlas Fund of Funds BMA Principle Guaranteed Dominion Stock Fund Ltd Ist Capital Mutual Fund Ltd Golden Arrow Selected Investec Mutual Fund Ltd First Dawood Mutual Fund JS Growth Fund JS Value Fund Meezan Balance Fund Prudential Stocks Fund Ltd Pak Oman Advantage Fund Pakistan Strategic Fund Pakistan Premier Fund PICIC Energey Fund PICIC Growth Fund PICIC Investment.Fund Safeway Mutual Fund Tri-Star Mutual Fund Ltd

T value

FIGURE 7

Selectivity of the fund is calculated through Fama decomposition measure. This indicates how much fund manager is efficient in selection of funds. If the value is significant and positive it means fund manager has highly selectivity skills. Fig 8 indicate the selectivity of the fund so from the result it is shown that investce fund manager has highly selective skill the value is that is highest then other. Whereas selective skill of BMA principle guranateeds fund manager is very low which is 1.004.
6 5 4 3 2 1 Al-Meezan Mutual Fund Asian Stocks Fund Ltd Atlas Fund of Funds BMA Principle Guaranteed Dominion Stock Fund Ltd Ist Capital Mutual Fund Ltd Golden Arrow Selected Investec Mutual Fund Ltd First Dawood Mutual Fund JS Growth Fund JS Value Fund Meezan Balance Fund Prudential Stocks Fund Ltd Pak Oman Advantage Fund Pakistan Strategic Fund Pakistan Premier Fund PICIC Energey Fund PICIC Growth Fund PICIC Investment.Fund Safeway Mutual Fund Tri-Star Mutual Fund Ltd 0 selectivity

CHAPTER 5 CONCLUSION AND RECOMMANDATIONS CONCLUSION

This paper provides an overview of the Pakistani mutual fund industry and investigates the mutual funds risk adjusted performance using mutual fund performance evaluation models. Survivorship bias controlled data of equity and balanced funds is used for the performance evaluation of funds. Mutual fund industry in Pakistan is still in growing phase. They are investing in the market very defensively as evident from their beta. Mutual Fund industrys Sharpe ratio is -0.73 as compared to market that is 0.27 risk premium per one percent of standard deviation. Results of Jensen differential measure show negative after cost alpha. Hence overall results suggest that mutual funds in Pakistan are not able to add value. Where as

results also show many of the funds under perform, these funds are facing the diversification problem. Worldwide there had been a tremendous growth in this industry; this growth in mutual funds worldwide is because of the overall growth in both the size and maturity of many foreign capital markets, we are far behind. The need of an hour is to mobilise saving of the individual investors through the offering of variety of funds (with different investment objectives). The funds should also disclose the level of risk associated with return in their annual reports for the information of investors and prospective investors. This will enable the investors to compare the level of return with the level of risk. The success of this sector depends on the performance of funds industry and the role of regulatory bodies. Excellent performance and stringent regulations will increase the popularity of mutual funds in Pakistan. This paper also investigate the performance through Treynors, Sharoe, Jenses Alpha and

Information ratio where as diversification, timing and selectivity of 22 mutual funds from

January 2005 to December 2009. From the ratios we come to know that result for all the companies are not same. But when we find the result form regression we see that fund manager of PICIC investment fund diversified the fund and have ability to take timly decision. Whereas the fund manager of BMA fund have selectivity skills. The findings indicate that diversification, selectivity and timing performance of all mutual funds are negative. Fund managers appear to possess inferior selection skills and poor market timing abilities. RECOMMANDATIONS Manager make investment decision based upon their personal abilities and risk preferences. Fund manager must have ability to take timly decision about the buy and sell of securities. Fund manager should select those securities that are diversified in nature. Fund manager possess superior skill for selection of security efficient market timing abilities.

Mutual funds have a progressive future in Pakistan but the mutual funds industry should take steps to create the much needed public awareness about the benefits mutual fund offers. These are the few suggestions to improve mutual fund penetration. 1. Mutual funds can initiate investor education and awareness campaigns through electronic and print media as well as through seminars, workshops, conferences for wide scale public dissemination of information on mutual funds and educate them about advantages of investing in mutual funds compared to the other types of conventional options. 2. Marketing campaign should be simple to understand for general masses. In spite of using jargons, use simple words in advertisement to educate investors. Unless public do not understand the products and their benefits compared to conventional products, they would reluctant to invest in mutual funds. 3. To improve outreach, mutual funds should open their branches in other major cities of Pakistan rather than just concentrating on few and make specialized workforce that interacts with

the individuals and rural population in vicinity of those cities to create awareness and generate business. 4. Dedicated professional fund management courses should be designed by business school of Pakistan in collaboration with players in mutual fund industry according to needs of the industry to overcome the problem of lack of professional fund managers.

REFERENCES
Annuar, M.N., Shamsher, M. & Ngu, M.H. 1997. Selectivity and Timing: Evidence from The Performance of Malaysian Unit Trusts. Pertanika Journal Social Science and Human, 5 (1), 45-57. Durga (Undated), Performance evalution of Tax saving Mutual fund Schemes in India, Working Paper. Roznli and Abdullah (Undated), Market timing and security selection performance of mutual fund: Evidence from Malaysia University Utara Malaysia, Working Paper. Shamsher, M., Annuar, M.N. & Taufiq Hassan. 2000. Investment in Unit Trusts: Performance of Active and Passive Funds. Paper presented at the Universiti Putra Malaysias FEP Seminar: Issues in Accounting and Finance, Kuala Lumpur. Becker, S. and G. Vaughan (2001), Small is beautiful. Journal of Portfolio Management, pp. 917. Bogle, John C. (1991), Investing in the 1990s: Remembrance of things past and things yet to come. Journal of Portfolio Management, pp. 5-14. Brown, S. J. and W. N. Goetzmann (1995), Performance persistence. Journal of Finance, Volume 50, pp. 679-699. Carhart, M. M. (1997), On persistence in Mutual Fund performance. Journal of Finance, Volume 52, pp. 56-82. Cheema, Moeen and Sikander A. Shah (2006), The Role of Mutual Funds and Non-Banking Financial Companies in Corporate Governance. Centre for Management and Economic Research (CMER) WorkingPaper No. 06-46: Lahore University of Management Sciences, Lahore Pakistan. Chen, J., H. Hong, M. Huang and J. Kubik (2004), Does fund size erode performance? Liquidity, organizational diseconomies and active money management. American Economic Review, Volume 94, pp. 1276-1302. Droms, W. G. (2006), Hot hands, cold hands: Does past performance predict future returns? Financial Planning Association Journal, May Issue, Article 7. Elton, E. J., M. J. Gruber, S. Das and M. Hlavka (1993), Efficiency with costly information: A reinterpretation of evidence from managed portfolios. Review of Financial Studies, Volume 6, pp. 1-22. Gallagher, David R. (2003), Investment manager characteristics, strategy, top management changes and fund performance. Accounting and Finance, Volume 43, pp. 283-309. George, P. Artikis (2001), Evaluation of balanced mutual funds: The case of the Greek financial market. Managerial Finance, Volume 27, Issue 6, pp. 60-67. Glenn, Brian, Bullrun Financial, Inc., Lawrenceville and Thomas Patrick (2004), The mechanics behind investment funds: Why closed-end funds provide superior returns? Managerial Finance, Volume 30, Number 12. Gorman, L. (1991), A study of the relationship between Mutual Fund return and asset size, 19741987. Akron Business and Economic Review, Volume 22, pp. 53-61.

ANNXURE

Return and Risk on Pertfolio Rp Al-Meezan Mutual Fund Asian Stocks Fund Ltd Atlas Fund of Funds BMA Principle Guaranteed Fund Dominion Stock Fund Ltd Ist Capital Mutual Fund Ltd Golden Arrow Selected Stocks Fund Investec Mutual Fund Ltd First Dawood Mutual Fund JS Growth Fund JS Value Fund Meezan Balance Fund Prudential Stocks Fund Ltd Pak Oman Advantage Fund Pakistan Strategic Fund Pakistan Premier Fund PICIC Energey Fund PICIC Growth Fund PICIC Investment.Fund Safeway Mutual Fund Tri-Star Mutual Fund Ltd -0.00907 0.10548 -0.02702 0.10548 -0.02333 0.10548 -.00731 0.10548 -0.01073 0.10548 -0.00066 0.10548 -0.0031 0.10548 -0.00014 0.10548 -0.00305 0.10548 -0.00805 0.10548 -0.00875 0.10548 -0.01818 0.10548 -0.01232 0.10548 -0.01922 0.10548 -0.0021 0.10548 .006326 .006326 .006326 0.2103 0.30927 .14388 -0.0163 -0.0213 -0.0187 -0.0758 -0.0583 -0.0274 -0.0274 -0.0289 -0.0101 -0.0239 -0.0966 -0.0805 -0.0137 0.2948 -0.0371 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 1.1925 -0.0116 0.10548 -0.00305 0.10548 -0.00488 0.10548 .006326 .15877 -0.0131 -0.0785 -0.162 1.1925 1.1925 1.1925 Rfr Rm .006326 SDp 1.19 -0.101 SDm 1.1925 1.1925 1.1925

-0.0369 0.10548 -0.00531 0.10548 -0.01169 0.10548

.006326 0.024755 0.28715 .006326 .15877 -0.0131

.006326 0.015984 .006326 0.22544

.006326 0.018984 .006326 0.18714

.006326 0.344174 .006326 .006326 .344174 0.1666

.006326 0.015984 .006326 0.026444 .006326 0.1288

.006326 0.172665 .006326 0.190995 .006326 0.01829

.006326 0.234599

MUTUAL FUND
Treynor Ratio Al-Meezan Mutual Fund 0.509794 Sharp Ratio -0.60746 Jenses Ratio -0.12576

Asian Stocks Fund Ltd

-0.30112

-0.34246

-0.08414

Atlas Fund of Funds BMA Principle Guaranteed Fund Dominion Stock Fund Ltd

0.888316

-0.73873

-0.12939

-1.099325823 1.06618

-3.00454215 0.084314211 -0.50605 1.06618

Ist Capital Mutual Fund Ltd

0.509215

-0.36583

-0.12643

Golden Arrow Selected Stocks Fund Ltd

0.516876

-0.40231

-0.1308

Investec Mutual Fund Ltd

8.541619

-0.35894

-0.13381

First Dawood Mutual Fund

0.539118

-0.69234

-0.14714

JS Growth Fund

1.06618

-0.50605

-0.11607

JS Value Fund

1.501734

-0.4669

1.501734

Meezan Balance Fund NAMCO Balanced

3.926585

-0.23616

-0.1082

0.650082654

-0.46954683 0.059016838

Prudential Stocks Fund Ltd Pak Oman Advantage Fund

-6.423414698 2.661097

-3.5570968 0.081155623 -0.46259 -0.1085

Pakistan Strategic Fund

0.800233

-0.50605

-0.11857

Pakistan Premier Fund

3.469582

-0.31471

-0.11592

PICIC Energey Fund

0.883957

-0.66325

-0.12383

PICIC Growth Fund

1.179625

-0.55043

-0.13166

PICIC Investment.Fund

0.650799

-0.58259

-0.1314

Safeway Mutual Fund

-0.33055

-0.53263

-0.09547

Tri-Star Mutual Fund Ltd

0.35069

-0.35456

-0.13431

R2 Al-Meezan Mutual Fund Asian Stocks Fund Ltd Atlas Fund of Funds BMA Principle Guaranteed Fund Dominion Stock Fund Ltd Ist Capital Mutual Fund Ltd Golden Arrow Selected Stocks Fund Ltd Investec Mutual Fund Ltd First Dawood Mutual Fund JS Growth Fund JS Value Fund Meezan Balance Fund NAMCO Balanced Prudential Stocks Fund Ltd Pak Oman Advantage Fund Pakistan Strategic Fund Pakistan Premier Fund PICIC Energey Fund PICIC Growth Fund PICIC Investment.Fund Safeway Mutual Fund Tri-Star Mutual Fund Ltd 0.7077 0.1681 0.3959 0.2283 0.6082 0.387 0.0096 0.0008 0.2512 0.7569 0.6843 0.2512 0.0749 0.7605 0.0101 0.0111 0.1818 0.0139 0.5666 0.0689 0.0291 0.5945

t value 0.5029 -2.2374 0.0595 0.9053 -1.214 0.4361

Selectivity 2.4405 2.7939 2.6586 1.004 4.5058 3.3913

0.9638 -1.5287 -2.1282 0.1579 -0.0658 -0.3329 -1.873 -8.6715 -1.1822 0.9053 1.8852 1.4666 0.5171 2.7253 -1.8586 -0.5966

3.3887 4.9103 2.1893 2.9444 2.4139 1.812 3.242 1.1409 2.1575 1.004 2.4002 2.3845 2.9757 2.5449 2.999 2.9745