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Do Mutual Funds play its role suitably in the Stock market in Bangladesh

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Md Bokhtiar Hasan
Islamic University (Bangladesh)
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 monthly review 8 JUNE 2018

Do Mutual Funds play its role suitably in the Stock market in Bangladesh?
Md. Bokhtiar Hasan 1

1. Preamble: 2.1. Risk Adjusted Performance Analysis:

In recent times, mutual funds The table-1 documents the risk-adjusted performance of
become an imperative tool to mutual funds, which is measured through applying three
investors, especially small and techniques; total average return, Sharpe ratio, and Treynor
new ones. Even though the ratio. All the mutual funds are ranked according to their
idea of it was grown in
performance and compared with market portfolio as proxy
Netherlands in 1774, the
by DSEX index. 1st rank refers to the best performance
modern day mutual funds
whereas 38th rank refers the worst one.
started being popularized from
1924. In Bangladesh, the Table-1: Risk-adjusted performance measures (Rating
mutual fund was initiated on Analysis) during January to June 2018
April 25th, 1980 with the hand of Investment Corporation of Name of Funds Total Average Return Sharpe Ratio Treynor Ratio
Value Ranking Value Ranking Value Ranking
Bangladesh (ICB). Now, the Dhaka Stock Exchange (DSE)
DSEX Index (0.00) 1 (0.87) 38 (0.01) 21
has only 37 mutual funds (till June, 2018) amounting US$
SEML Lecture Equity Mgt Fund (0.01) 2 (0.14) 1 (0.01) 6
48.76 Crore, which accounts less than one percent of total
SEML IBBL Shariah Fund (0.01) 3 (0.14) 2 (0.18) 37
market capitalization of DSE, whereas in many developed
Grameen One : Scheme 2 (0.01) 4 (0.14) 3 (0.01) 14
countries, the share of mutual funds is about 40% or more
IFIL Islamic MF-1 (0.01) 5 (0.15) 6 (0.01) 17
of the total market capitalization. Moreover, their
DBH First Mutual Fund (0.01) 6 (0.15) 10 (0.01) 13
performance in recent years puts them into more questions.
AIBL 1st Islamic MF (0.01) 7 (0.15) 8 (0.02) 26
Investing in mutual fund is generally assumed as safe, but
CAPM BDBL MF 01 (0.01) 8 (0.15) 5 (0.01) 5
is it true for investors in Bangladesh? Can investors of DSE
PHP First Mutual Fund (0.01) 9 (0.16) 11 (0.01) 8
rely on mutual funds? Today I shall focus on the overall
1st BD Fixed Income Fund (0.01) 10 (0.16) 17 (0.01) 16
performance of mutual funds at DSE.
First Janata Bank MF (0.01) 11 (0.16) 19 (0.01) 19
2. Performance Analysis of Mutual Funds in
ICB AMCL 1 Agrani Bank MF (0.01) 12 (0.16) 13 (0.03) 34
Bangladesh:
Prime Bank 1st ICB AMCL MF (0.01) 13 (0.16) 15 (0.02) 29
The data used in this analysis covers period between Jan 1,
Phoenix Finance 1st MF (0.01) 14 (0.16) 14 (0.01) 7
2018 and June 28, 2018. Daily prices of mutual funds listed
Green Delta Mutual Fund (0.01) 15 (0.16) 23 (0.01) 18
on DSE are used for return calculation. For calculating
ICB AMCL Third NRB MF (0.01) 16 (0.16) 16 (0.01) 11
average dividend, eight years’ data are used.
ICB Employees Prov. MF 1: Sch.1 (0.01) 17 (0.16) 21 (0.01) 9
The report’s endeavor is to find out the answers of the Trust Bank 1st Mutual Fund (0.01) 18 (0.16) 25 (0.01) 12
questions; like whether the funds’ mangers are utilizing the ICB AMCL SBL. 1st MF (0.01) 19 (0.15) 4 (0.02) 28
investors’ money efficiently or not; are mutual funds AB Bank 1st MF (0.01) 20 (0.16) 26 (0.01) 10
generating returns greater than market average; how is the LR Global Bangladesh MF 1 (0.01) 21 (0.16) 12 (0.60) 38
sectoral performance of mutual funds? The performance of Popular Life First MF (0.01) 22 (0.16) 27 (0.01) 15
mutual fund is always concerned for both the investors and Asian Tiger Sandhani Life Growth Fund (0.01) 23 (0.16) 30 (0.01) 22
fund managers alike. Investors seek this information to EXIM Bank 1st MF (0.01) 24 (0.16) 22 (0.01) 24
facilitate their investment decisions appropriately while fund IFIC Bank 1st Mutual Fund (0.01) 25 (0.16) 31 (0.01) 20
managers do the same to evaluate their own performance ICB AMCL 2nd NRB MF (0.01) 26 (0.16) 32 (0.02) 31
in order to realize their shortcomings. Although there are EBL NRB Mutual Fund (0.01) 27 (0.16) 28 (0.02) 30
several ways of assessing the performance of fund ICB AMCL Second MF (0.01) 28 (0.16) 24 (0.03) 35
managers, here risk adjusted return analysis, fundamental Vanguard AML BD Finance MF 1 (0.01) 29 (0.15) 9 0.01 3
analysis, and sectoral analysis are basically applied.

36
 Dhaka Stock Exchange Limited

Name of Funds Total Average Return Sharpe Ratio Treynor Ratio value of fund. It is usually assumed that the fund’s price
Value Ranking Value Ranking Value Ranking should move close to its NAV. But it seldom happens in
Southeast Bank 1st MF (0.01) 30 (0.16) 20 0.01 1 Bangladesh. If we observe the information presented in the
"Reliance 1" the 1st sch. of Rel. Ins. MF (0.01) 31 (0.16) 18 0.01 2 table-2, we unearth that most of the funds’ prices are fixed
Vanguard AML Rupali Bank Bal. Fund (0.01) 32 (0.17) 34 (0.08) 36 below their NAV. Although it is common that the prices of
NCCBL Mutual Fund-1 (0.01) 33 (0.16) 33 0.01 4
mutual funds are fixed below their NAVs, but in case of
NLI First Mutual Fund (0.01) 34 (0.16) 29 (0.02) 32
Bangladesh, the difference between funds’ price and their
Prime Finance First MF (0.01) 35 (0.17) 35 (0.02) 27
NAVs is significant. There may have four possible reasons.
EBL First Mutual Fund (0.01) 36 (0.17) 36 (0.01) 23
First, the market is inefficient. Second, funds could not gain
CAPM IBBL Islamic Mutual Fund (0.01) 37 (0.15) 7 (0.03) 33
proper attention of investors. Third, investors may have
MBL 1st Mutual Fund (0.01) 38 (0.18) 37 (0.01) 25
deficiency in knowledge about NAV and its implication.
Funds' Average Performance (0.01) - (0.16) - (0.03) -
Fourth, investors may have knowledge, but they may not
have faith on NAV calculations.
According to total average return, it is observed that all the
In recent years, some mutual funds distribute stock dividend
funds including market have negative returns. The market
rather than cash. This could be another important reason
index is here ranked on first position, implying that all the
which might trigger the funds’ prices down more. Since a
funds generating average returns are less than that of
major part of mutual funds’ lovers are either retired persons
index. All the funds along with market have also negative
or fixed income seekers, they always prefer regular cash
returns based on Sharpe ratio. The funds’ average Sharpe
income in the form of cash dividend to the future growth in
ratio is -0.16 while the corresponding value for the index is
the form of stock dividend.
-0.87 which is less than funds’ average ratio. According to
Sharpe ratio, index is ranked on 38th place revealing that The below table-2 also documents funds’ average dividend

most of the funds are performing better than index although during last eight years where we witness that only 8 out of

all funds have negative returns. Unlike four funds, all have 37 funds provide double digit average dividend (yearly). In

negative returns too based on Treynor ratio. The average contrast, the fixed income securities especially Govt. saving

values of Treynor ratio for the funds are -0.03 whereas the certificate is providing 12% interest, some commercial

corresponding value for index is -0.01. The index is ranked banks and financial institutions are also still offering around

on 21st uncovering that half of the funds are performing 9% interest, and their income is comparatively safe. Why do

better than market and the rest half are performing worse people put their money on mutual funds which is riskier

than market. From the above risk adjusted performance along with lower return? Under this circumstance, it would

analysis, it is witnessed that according to risk unadjusted evidently be an unwise decision for investors to choose

return (average return) all the funds are ranked following the mutual funds instead of other fixed income securities.

index, which signifying the failure of all funds’ managers in

Table: 2- Fundamentals of Mutual Funds as on July 05, 2018
performing superiorly over the market. But, the fund
managers might get comfort knowing that their risk adjusted SI Name of Funds Close Price NAV Difference Last 8 Years
performances are slightly better than market even though No. As on As on between NAV and average
JULY 05, 2018 JULY 05, 2018 Close price dividend (%)
majority funds have negative returns. Therefore, fund
1 Grameen One : Scheme Two 16.30 19.32 -3.02 14.29
managers have failed to demonstrate their selection skill in
2 NLI First Mutual Fund 14.50 16.24 -1.74 12.80
Bangladesh.
3 Asian Tiger Sandhani Life Growth Fund 10.80 13.44 -2.64 12.67
2.2. Fundamental Performance: 4 Southeast Bank 1st Mutual Fund 13.70 15.17 -1.47 12.00

Table-2 presents some fundamental factors of mutual funds 5 Vanguard AML Rupali Bank Balanced Fund 8.70 10.87 -2.17 12.00

as on July 05, 2018. The most fundamental factor of mutual 6 AB Bank 1st MF 5.90 11.84 -5.94 11.00

fund is its net asset value (NAV), which is basically the true 7 ICB AMCL 2nd NRB MF 9.80 11.00 -1.20 10.71
8 First Janata Bank MF 6.20 11.11 -4.91 10.14

37
 monthly review 8 JUNE 2018

SI Name of Funds Close Price NAV Difference Last 8 Years Considering these two indicators, it can be seemed that
No. As on As on between NAV and average
JULY 05, 2018 JULY 05, 2018 Close price dividend (%) their performance is better than that of other sectors. But,
the situation is not like that. The funds’ lower P/E ratio is
9 Prime Finance First MF 11.90 11.03 0.87 9.93
explained by their lower prices. Most of the companies
10 1st Bangladesh Fixed Income Fund 5.50 11.40 -5.90 9.80
basically pay stock dividend rather than cash, while the
11 EXIM Bank 1st MF 6.50 11.82 -5.32 9.25
funds pay cash rather than stock dividend. As a result, the
12 "Reliance 1" the 1st sch. of Rel. Ins. MF 10.60 13.79 -3.19 9.25
funds have comparatively higher dividend yield. For these
13 ICB AMCL Sonali Bank Ltd. 1st MF 8.40 9.29 -0.89 8.75
reasons, investors are not investing their funds into mutual
14 Vanguard AML BD Finance Mutual Fund One 9.10 10.88 -1.78 8.75
funds in spite of having lower P/E ratio as well as higher
15 EBL First Mutual Fund 7.60 11.43 -3.83 7.86
16 IFIC Bank 1st Mutual Fund 5.60 11.12 -5.52 7.43 dividend yield.
17 EBL NRB Mutual Fund 5.80 11.18 -5.38 7.17 Table-3: DSE Sectoral Performance - June 2018
18 Trust Bank 1st Mutual Fund 6.10 11.57 -5.47 7.14 Sector Market Capitalization Turnover P/E Dividend Yield (%)
19 NCCBL Mutual Fund-1 7.50 11.14 -3.64 6.80 Tk. in mn. Tk. in mn. as on as on
28-Jun-18 % of total M. Cap. (Jan-Jun)’18 % of total turnover June 28, 2018 June 28, 2018
20 Popular Life First MF 5.60 11.17 -5.57 6.71
Banks 566,934.62 17.37 79,374.78 14.36 8.76 5.87
21 AIBL 1st Islamic MF 7.80 10.95 -3.15 6.70
Telecommunication 542,100.46 16.61 21,652.76 3.92 19.54 5.14
22 SEML Lecture Equity Management Fund 8.00 10.71 -2.71 6.25
Pharmaceuticals & Chemicals 522,117.60 16.00 74,523.63 13.48 20.61 1.78
23 LR Global Bangladesh MF One 8.00 11.33 -3.33 5.80
Fuel & Power 397,528.45 12.18 48,947.40 8.86 12.55 4.62
24 IFIL Islamic Mutual Fund-1 7.30 9.23 -1.93 5.57
Food & Allied Product 276,142.15 8.46 26,881.08 4.86 26.65 1.75
25 PHP First Mutual Fund 6.20 11.14 -4.94 5.29
Financial Institutions 210,151.75 6.44 24,979.59 4.52 14.66 2.93
26 Prime Bank 1st ICB AMCL MF 6.70 8.59 -1.89 4.43
Engineering 190,590.29 5.84 80,238.54 14.52 16.77 2.34
27 ICB Employees Provident MF 1: Sch. 1 6.40 7.97 -1.57 4.21
Cement 117,546.67 3.60 6,477.17 1.17 34.57 2.26
28 MBL 1st Mutual Fund 7.70 11.24 -3.54 4.14
Textile 116,581.81 3.57 71,099.03 12.87 17.58 4.16
29 Phoenix Finance 1st MF 6.30 8.36 -2.06 3.57
Insurance 85,592.57 2.62 16,352.06 2.96 11.00 3.29
30 ICB AMCL Second MF 7.60 9.22 -1.62 2.94
Miscellaneous 77,445.73 2.37 37,610.21 6.81 16.93 3.18
31 ICB AMCL Third NRB MF 6.00 7.95 -1.95 2.86
Mutual Funds 40,809.35 1.25 7,096.08 1.28 7.63 6.79
32 SEML IBBL Shariah Fund 9.20 10.42 -1.22 2.50
Ceramic 29,884.48 0.92 14,001.23 2.53 26.10 1.64
33 DBH First Mutual Fund 9.20 11.96 -2.76 2.09
Tannery 26,509.00 0.81 11,294.28 2.04 15.77 2.63
34 Green Delta Mutual Fund 8.70 12.01 -3.31 2.07
Travel and Leisure 21,829.10 0.67 7,557.93 1.37 27.04 3.57
35 CAPM BDBL Mutual Fund 01 7.90 10.27 -2.37 2.00
Services & Real estate 19,121.81 0.59 4,137.43 0.75 16.67 3.70
36 CAPM IBBL Islamic Mutual Fund 8.50 9.98 -1.48 0.00
IT - Sector 15,243.82 0.47 12,003.23 2.17 25.98 2.19
37 ICB AMCL First Agrani Bank Mutual Fund 7.50 10.12 -2.62 0.00
Corporate Bond 2,886.00 0.09 44.13 0.01 - -
Paper & Printing 2,156.78 0.07 499.77 0.09 - -
2.3. Sectoral Performance: Jute 1,945.51 0.06 3,328.21 0.60 122.06 0.42
The table-3 represents sectoral performance of DSE. It Grand Total 3,263,117.95 548,098.56 14.97 3.63

evidences that the contribution of mutual funds to the stock

market in Bangladesh is very low (only 1.25% based on
2.4. IPO Subscription:
market capitalization). Their contribution to total turnover of
If we review the last few IPOs of mutual funds, we
DSE is also very low (1.28% during last six months).
observe that most of the IPOs were undersubscribed and
Comparing to other sectors, their contribution is much lower.
it is gradually being increased. There can be several
On the other hand, the P/E ratio of mutual funds is the
reasons for this under subscription. Since many years,
lowest among all sectors of DSE. Literally, we know that
the mutual funds failed to produce significant returns for
lower P/E ratio is better. In this sense, the mutual funds are
their holders. In addition, their prices remained low since
comparatively in a better positive for investment. Their
many years, which devastate the confidence of investors
dividend yield is the highest, which is also desirable.
regarding mutual funds.
38

Table-4: IPO Subscription of Mutual Funds During Last
Few Years
Name Subscription (Times)
CAPM IBBL Islamic Mutual Fund 0.56
ICB AMCL First Agrani Bank Mutual Fund 0.96
SEML IBBL Shariah Fund 1.01
CAPM BDBL Mutual Fund 01 0.29
Vanguard AML Rupali Bank Balanced Fund 0.57
Vanguard AML BD Finance Mutual Fund One 0.35
SEML Lecture Equity Management Fund 1.01
Asian Tiger Sandhani Life Growth Fund 0.35
3. Conclusion:
The precondition of development of any stock market is to
have a strong mutual funds market. Mutual funds increase
marketability and depth of a stock market. Besides, mutual
funds play very critical role especially in a crisis moment at
stock market. Sometimes, ICB along with other institutional
investors support stock market in a crisis moment, but those
supports are not sufficient.
Hence, the exchange authority should immediately take
initiative to improve the condition of mutual funds unless the
overall market development will not be visible. Some
propositions can be prescribed to exchange authority as
well as funds to improve the situation of this industry.
Propositions:
1. To gain attention of investors, funds, at first, have to
ensure higher or at least similar return with other fixed
income securities.
2. Hypothetically, we pronounce that money collected from
investors will be managed by professional mangers. But
the funds could not appoint such professionals or
experts in Bangladesh? The exchange authority can fix
the minimum qualifications and skills
professionals. In addition, training of professionals
should be compulsory in foreign renowned institutions.
3. Another important reason of disheartening investors
from investing in funds is low disclosure. Only NAV and
net profit are not sufficient to make decision for investing
in funds, fund portfolios are also necessary to know. In
many countries, fund managers disclose their portfolios
View publication stats
Dhaka Stock Exchange Limited
holding to public regularly. The exchange authority in our
country can initiate the same.
Year 4. As I mentioned earlier, the decision to allow funds to
2018 declare stock dividend has been poison pill for
2017
exchange. No fund in the world distributes stock
2017
dividend and this is contradictory too with its core
2016
objective. The authority immediately withdraws this
2016
reckless decision.
2015
2015 5. A number of fund managers invested their money
2015 outside of the stock market (as reported in Dhaka
Tribune, 1st February, 2018). This might create
confusion among investors. They may think that funds
have been diverted for other purpose. It could be
another reason of reducing investors’ confidence
regarding funds.
6. To ensure sufficient supply of professionals and experts
in stock market, the authority should establish
specialized institutions. Even through the BICM is trying
to play role in this regard, their activities are still confined
with some training coupled with some diploma degrees
to investors. Besides, our universities and other
educational institutes did not include any curriculum
regarding the capital market functioning to their
academic text book. Whatever included based on USA
or other developed capital market and mostly impractical
in the context of stock market of Bangladesh.
The exchange authority has already taken enough initiatives
to reform our stock market. Now, it is the high time for
authority to keep an eye on mutual funds development. If it
is possible to ensure the development of mutual funds, our
stock market will certainly be advanced.
1 The author of this note is currently serving as an Assistant
Professor in the department of Finance and Banking, Islamic
for the
University, Kushtia. He has extensively published on capital market
issues in international journals. You can catch the author at E-mail:
Bokhtiar_bank@yahoo.com
* A Special thank to my beloved student, Mr. Md. Mahmudur
Rahman Rabbi (6th Batch), for helping me a lot in compiling data
relevant to this write-up.
39