performance evaluation of ICB mutual funds

Chapter: OneIntroduction

Performance Evaluation of ICB Mutual Funds 1

Introduction

1.1 Background of the Report:

Internship means receiving practical training through attending particular work

physically. Practically training means a way through which a person or a trainee can

gather experience about the related subjects and be able to apply his theoretical

experience in the field of real life action. Practical training is necessary to achieve

complete knowledge about something. Internship program is actually a form of

practical training.

As a student of BBA, major in Marketing Studies, internship is an academic

requirement. For doing internship every student is required to work in a selected

institution to enhance ones practical knowledge and experiences. For my internship, I

was gone to the Investment Corporation of Bangladesh (ICB), under the supervision

of Asst. Prof. Md. Masum Iqbal, Department of Business Administration, Daffodil

International University.

The purpose of this report, “Performance Evaluation of Mutual Funds of ICB.” is

to evaluate the performance of the Mutual Funds that are being traded in our country.

1.2 Rationale of the Study:

The Bangladeshi capital market has been increasing tremendously during last couple

of years. With the reforms of economy, reforms of industrial policy, reforms of public

sector and reforms of financial sector, the economy has been opened up and many

developments have been taking place in the Bangladeshi money market and capital

market. In order to help the small investors, mutual fund industry has come to occupy

an important place.

In recent days, asset management companies are emerging at a great pace. Due to

economic sloth and recession of the economy, investment went down at a great extent

which caused a low return on investment in different sectors. During that time, while

other countries’ capital market moved downward, Bangladesh’s capital markets

followed less with those. For that reason, more and more investors came into the

capital market with their savings not putting them into banks and it has caused the

capital markets (DSE & CSE) to boom. Moreover, upward trend in prices of stocks

have incited other non-listed companies to come forth through initial public offering.

As a result, supply of stocks is increasing. This was not that end with happiness. Stock


markets are still lacking of good and growth-based stocks and gambling has been

going on. Small investors are becoming victim of those unlawful acts of those

gamblers for their unwise decision. Risk in investing stocks has now become riskier.

Small investors face a lot of problems in the share market; limited resources, lack of

professional advice, lack of information etc. Mutual funds have come as a much

needed help to these investors. It is a special type of institutional device or an

investment vehicle through which the investors pool their savings which are to be

invested under the guidance of a team of experts in wide variety of portfolios’ of

Corporate securities in such a way, so as to minimize risk, while ensuring safety and

steady return on investment. It forms an important part of the capital market,

providing the benefits of a diversified portfolio and expert fund management to a

large number, particularly small investors.

ICB Mutual Funds have been mobilizing savings from the investors by way of selling

certificates and investing the funds in portfolio securities in secondary markets so as

to ensure maximum return for certificate holders and ensure the liquidity of the

markets. Return from mutual funds inevitably depends on the performance and ability

of the fund managers to construct and manage portfolios that generate above average

risk-adjusted return.

In this paper, I tried to analyze and represent the mutual funds of Investment of

Corporation of Bangladesh (ICB). This paper will show the organization structure,

valuation policies, investment policies and restriction, portfolio strategies and

performance evaluation of eight funds which will be helpful to investors to understand

the trend of return and risk of a fund and the market.

1.3 Objectives of the Report

Primary objective of the report is to meet the requirements for the fulfillment of BBA

program. The core objectives of the study are as follows:

To understand the operation and management of investment banking in Bangladesh.

To know the role of Investment Corporation of Bangladesh (ICB) as the market maker.

To understand the activities and contribution of mutual funds in the capital markets.

To obtain the knowledge about how the ICB Mutual Funds are managed.

To evaluate and analyze the portfolio performance of ICB Mutual fund.


1.4 Methodology

This study is conducted based on the application of theoretical knowledge of the field

of management and the practical working experience from Investment Corporation of

Bangladesh (ICB) as internship course. Investment Corporation of Bangladesh is the

pioneer and one of the best performing investment banks in Bangladesh. Its public

reporting system is awarded by Institute of Chartered Accounts of Bangladesh

(ICAB) for Published Accounts and Reports in the Public Sector Entities. Its data

arrangement is logical that helps in easy application of analytical tools.

1.5 Data Collection

In order to prepare the assigned report all the necessary data and information have

been collected from Primary and Secondary sources.

a) Primary Sources of Information

Primary data had been collected through interviews and discussions with the officials

of various departments, study of different files of different sections and the practical

working experience gained from different departments. Normally, head of the

departments or their approved officials gave the briefing about their respective

departments.

b) Secondary Sources of Information

The main sources of the secondary information were the Annual Reports of ICB

Mutual Funds, Annual Reports of Investment Corporation of Bangladesh, Dhaka

Stock Exchange Library, Investment Corporation of Bangladesh Library, Official

website of Dhaka Stock Exchange, Official website of Investment Corporation of

Bangladesh and Planning and Research Division of Investment Corporation of

Bangladesh. Besides, data are also collected from different books, journals and

internet


1.6 Limitations of the Study:

As previously stated this study has been conducted with the data collected based on a

specific time period may have been affected by the sample selection bias. There are

some specific limitations in this study:

Relevant information was not as available as required. In some cases updated

information was not available.

Due to time constraint limited analytical tools have been used to draw the

conclusion of the study.

ICB Mutual Funds are thinly traded shares. Estimates for securities' systematic

risk, the beta coefficients, are highly affected by infrequent trading. The beta

correction for thinly traded shares is beyond the scope of this analysis.

Investment Corporation of Bangladesh (ICB) is one of the largest investment

banking institutions in Bangladesh. In a short span of time like internship

program it was not possible to get in-depth knowledge about such a large

corporation.

Officials of ICB maintain a very busy schedule. So they were not always able

to provide enough time to enlighten the internee students every time, even if

they were very helpful and supportive.

In the face of these limitations, the study has been conducted and the report has been

prepared with the best efforts and integrity.


Chapter: TwoOrganizational Profile


2. Organizational Profile2.1 Historical Background of ICBThe Investment Corporation of Bangladesh was established on 1st October 1976,

under “The Investment Corporation of Bangladesh Ordinance, 1976 ( NO. XL of

1976)”. The establishment of ICB was major step in a series of measures undertaken

by the Government to accelerate the pace of industrialization and develop a well

organized and vibrant Capital market particularly securities market in Bangladesh.

ICB caters to the need of institutional support to meet the equity gap of industrial

enterprises. In view of the notational policy of accelerating the rate of savings and

investment to foster enactment of the Investment Corporation of Bangladesh

(Amendment) Act, 2000, (No. XXXIV of 2000 ) , reforms in operational strategies

and business policies have been taken place by establishing and operating subsidiary

companies under ICB.

2.2 Objectives of ICBThe main objectives of the ICB are as follows:

a. To encourage and broaden the base of investment.

b. To develop the capital market.

c. To mobilize savings.

d. To promote and establish subsidiary companies for business development .

e. To provide for matters ancillary thereto.

2.3 Nature of the Business:The principle activities of ICB are providing various kind of services to customers

specially investment banking services. The activities that are mainly included are

underwriting public issue of shares and providing bridge financing against such

underwriting, providing debenture loan to companies & loan to operative investors on

margin trading basis, management of unit fund and mutual funds as well as operating

investors accounts and participation in stock market for trading securities on behalf of

unit fund, mutual funds, investors and corporation itself.

2.4 Functions of ICB Direct purchase of shares and debentures including placement and equity

participation

Providing lease finance singly and through syndication

Managing existing investment accounts

Managing existing mutual funds and unit fund


Managing portfolios of existing business

Providing advance against ICB unit and mutual fund certificates and ICB

AMCL Unit Fund certificates

Providing consumer credit

Providing bank guarantee

Acting as trustee and custodian

Participating in and financing of joint-venture companies

Providing investment counseling to investors

Participating in government divestment program

Supervising the activities of subsidiary companies

Venture capital financing

Managing Equity and Entrepreneurship Fund(EEF)

2.5 Organizational Structure of ICB

Institutional Framework of ICBInvestment Corporation of Bangladesh is a corporate body as per section 3 of

Investment corporation of Bangladesh Ordinance 1976 and deemed to be a banking

company within the meaning of the Banking Companies Ordinance !962. The shares

of the corporation are listed with the stock exchange. ICB is an authorized broker of

DSE and CSE.

Regulatory Framework of ICBAs mentioned earlier the regulatory framework of ICB is the Investment Corporation

of Bangladesh Ordinance 1976. This ordinance and regulations laid under the

authority of the ordinance is the source of all power and authority of ICB. Through

the recent enactment of “The Investment Corporation of Bangladesh(Amendment)

Act, 2000” scope of ICB’s activities through the formation of subsidiaries, have been

expanded. In addition to these for carrying its activities it has to compel by

Companies Act 1994, Trust Act 1882, Insurance Act 1983, Security and Exchange

Commission Act 1993, Banking Companies Act 1993, Foreign Exchange Regulation

1974, Income tax etc.

Management of ICBThe head office of the corporation as per the requirement of the ordinance of ICB is

located at Dhaka. The general direction and superintendence of the corporation

created in a board of directors, which consists of persons including the chairman and

managing director of ICB.


The board of directors consists of the following directors:

a) The Chairman to be appointed by the government.

b) The directors to be appointed by the government from among persons

serving under the government.

c) One director to be nominated by the Bangladesh Bank.

d) The managing directors, Bangladesh Shilpa Bank, Ex-office.

e) The managing directors, Bangladesh Shilpa Rin Shangshta, Ex-office.

f) Four other directors to be elected by the shareholders other than the

government, BB, BSB and BSRS.

g) The managing director of ICB to be appointed by the government.

Administration, Human ResourceInvestment Corporation of Bangladesh (ICB) is providing different categories of

financial and banking service. Nature of different division/departments very, such that

Economic and Business Research (EBR) Department requires teamwork, Loan

Appraisal division requires professional work, Funds division needs chain work.

Managing Director is entrusted with authority to transact the regular business of the

organization; he may delegate some authority to officials of the corporations.

However most of the policy decisions are taken by the different committee with the

approval of managing director with and where required of the Board in discharging of

the function stated under the ordinance. The board may appoint such other committee

as it think fit to assist it in the efficient discharge of its functions. So far, board has

appointed two such committees Economic and Business Research committee and loan

appraisal committee headed by General Manager.

Board of Directors of ICBThe Board is comprised of 11 directors. Except managing directors, all directors are

non-executive and independent and represent government, banks, Insurance, financial

institutions and general public.

2.6 Functions of Several Departments of ICB:The organizational setup of ICB is functionally divided into two broad groups:

Operation Wings

Administrative Wings


The functions of the Operation wings are involved with activities related to project

financing, Research, Computer, Unit & Mutual Funds, Investment Accounts,

Shares/Stocks/Debentures/ Bonds, Securities & Transactions etc.

The functions of the Administrative wings are involve with the activities relating to

General Administration, Accounts, Implementation & monitoring of Projects,

Recovery, Public Issues & Legal matters.

Under the each wings, there are some distinctive departments (round about 16 in no.)

through which the objectives & strategic plans of the corporation are implemented.

These departments are: Project Loan Accounts Department

Central Account Department

Law Department

Public Issue Department

Recovery & Follow-Up Department

Project Implementation Department

Economic & Business Research Department

Loan Appraisal Department

Share Department

Transaction Department

Investors Department

Mutual Fund Department

Unit Sales Department

Unit Registration & Purchase Department

Human Resource Department

Personnel Department

The functions of the significant departments are given in the following pages:

Project Loan Accounts Department: This department presents up to date information about projects to the other related

department. Functions of this department are:

Issue check to the projects after getting disbursement order from the PIC.

Maintenance of registers for interest penalties, interest dues & interest over-

dues.

Calculation of interest & preparation of periodical bills.

Preparation & dispatch of statement of accounts.

Any other assignment asserting by the management.


Central Accounts Department:All kinds of receipts & payments of ICB are done by the central accounts Department.

The important functions of this department are:

Prepare income tax return and matters relating to accounts.

Prepare bills including projects accounts & their maintenance.

Prepare salary statement, overtime statement.

Make payment of all bills.

Prepare financial statements.

Keep accounts of unit funds & mutual Funds.

Keep accounts of Govt. loans.

Maintain liaison with the external & commercial audit.

Maintaining of investors account & portfolio ledgers.

Calculation of quarterly interest.

Ensure proper budgetary control.

Prepare annual budget for the corporation.

Furnishing of information to the other departments related to investors

scheme.

Determine the sources, raising funds from their and manage the funds in an

efficient way.

Law Department:This is a specialized department empowered to:

Process all legal matters.

Prepare legal documents, advance agreements, share agreements.

Make correspondence with the company.

Arrange execution of under-writing-cum –advance agreement, underwriting

arrangement.

Preserve, supervise and keep in safe custody of legal security departments.

Coordinate with the management, ministries & other Govt. officers in respect

of legal affairs.

Public Issue Department:The public issue department is the vital department in the context of ICB with its

following activities:

Visit & collect audited financial statement from the sponsors.

Analyze the financial statement of on-going projects.

Advice, pursue sponsors for going to the public issue.

Assists sponsors to prepare prospectus & examine its accuracy.


Advice companies in issuing allotment letters.

Other functions assigned by the management.

Recovery & Follow-Up Department:ICB has three modes of finance, namely bridge loan, debenture loan & share purchase

loan. The recovery & follow up department is the key operation department as it

ensures the recoiling of funds provided as credit. The major activities of this

department are:

Recover the principles & interest due on the sanctioned projects.

Analyze balance sheet & sanction study review.

Furnishing information to different department of ICB.

Assist the law department of the corporation.

Analyze the problems of the sick projects.

Recommended for making necessary provision for doubtful debts.

Ensure recovery of dues/ over dues from sponsors.

Visit of projects, examine the problems & provide solutions.

Project Implementation Department:

It starts work after LAD & law department, which are closely related. This

department mainly focuses on bringing loan. The functions of this department are:

Help implementation of sanction project.

Review progress of implementation project.

Submit progress report to the management regarding implementation.

Inspect the site & books account of project.

Make recommendations for additional loans appropriate cases.

Provide counseling for solution of any dispute & problems.

Contact with the consortium member.

Economic & Business Research Department:

This department is functioning as a provider of up to date information & summarizing

all the information to justify new opportunities of business. It is a decision making

department. The functions of this department are:

Conduct meeting with the securities purchase & sale committee.

Fixing budget for branches & department.

Finalizing annual report of the ICB.

Prepare MIS report which contains updated business performance.

Prepare five years performance appraisal report.


Prepare & distribute annual report, board memo etc.

Maintain information related to SE & CSE.

Manage the business development cell.

Maintain liaison with the Ministry of Finance.

Portfolio management of the organization.

Perform all activities related to South Asian Development Fund (SADF).

Loan Appraisal Department:This department is to work out the viability of the finance hopeful forecasting about

safety, security & risk of investment. ICB is responsible for providing credit facilities

to the public ltd. Companies in two ways to meet the equity gap.

Functions of this department include the activities related to the investment decisions,

which are summarized below:

Receive investment proposals from sponsors.

Prepare appraisal report on projects & conduct meeting with the project

appraisal committee.

Place appraisal of the project to board & consortium.

Conduct consortium meeting & coordination with the consortium members.

Apprise management on technical aspect of projects.

Issue sanction letter to projects.

Maintain liaison with the commercial banks.

Share Department: This department, subject to act as a custodian of ICB portfolio & investors accounts.

It maintains IPO shares, right shares, secondary shares from transaction department &

the bonus share of the company. All these activities are performed into five different

sections:

I. Permanent Reconciliation Cell

II. Fund Portfolio Section

III. Investors Portfolio Section

IV. Sales & Withdrawal Section

Transaction Department:It deals with investors’ sales & purchases order of securities. The prime functions of

this department are as follows:

Sell & buy shares from the secondary market.

Keep record of all types of shares transactions.

Verify the order according to the previous transactions.


Collecting financial statement, buyers & sellers advice for the transaction

already done in DSE.

Prepare purchase & sale confirmation statements on behalf of the branch

office.

Calculate the net of all the transactions.

Deposits the checks and securities payable to the DSE & CSE.

Collect the receivables checks from the DSE & CSE.

Deal with receipt and remittance of foreign currency regarding Wage Earners’

Mutual Fund, Unit Fund etc.

Investors Department:This department deals with the investors’ scheme, which starts operation on 13th

June, 1977. The prime functions of the investors’ department are as follows:

Open & maintain Investors account.

Sanction loans against deposits in investment accounts.

Buy & sale shares on behalf of the investors both from the primary &

secondary market.

Counsel investors in respect of building up their portfolios.

Withdrawal funds & shares from investors account.

Issue income tax certificate, portfolio statement, account statement etc.

Provide services to investors account holders.

Receive direct application against public issue of shares.

Keep financial records of all existing investment accounts.

Posting of all transactions.

Mutual Fund Department:The prime functions of mutual fund department are as follows:

Act as manager of all mutual funds.

Receive applications from general public in respect of new issues of mutual

funds.

Prepare prospectus in connection with the floatation of mutual funds.

Arrange for lottery, in necessary for allotment.

Examine the application for allotment of shares against application made.

Prepare registers of allotters.

Issue allotment share certificates.

Arrange refund of excess application money.


Make correspondents with the branches of the corporations, bank & certificate

holders.

Arrange for payments of brokerage & commission to the stock exchange

members for successful application submitted under the membership sales &

the bankers to the issue respectively.

Issue duplicate allotment the date of payment of dividend on Dividend

Warrants.

Unit Sales Department:The unit sales department is entrusted with the following responsibilities:

Sale of units to the investors.

Enchased the units by the way of surrendering the certificate along with the

prescribed surrendering forms duly filled in & signed by registered holders &

no prior notice is required.

Transfer unit certificate if applied with the prescribed form.

Consolidated the units if applied for.

Splits the units if applied for.

Issues dividend warrants & CIP certificates to the holders.

Coordinate activities of bank branches in respect of unit sales & repurchases.

Transmission of units in case of death of the unit holders.

Unit Registration & Purchase Department:This department works for the record keeping mainly. It records register wise ledger

entry of information of unit holders & this type of entry. On this basis total balance of

units & dividends is calculated & dividend warrants are delivered to the unit holders.

As for work efficiently, & provide maximum service to the unit certificate holders,

this department performs the following tasks:

Registers & transfer unit certificates.

Maintain a separate registers for unit holders ICP.

Maintain signature of transfer deed.

Preparation of dividend lists from the ledger posting & CIP marking.

Posting all the information related to the sale, transfer & purchase from the

statement after receiving from Unit Sales department of the ICB head office &

the other issuing offices in the ledger registration wise.

Issue dividend warrants & CIP certificates to the holders.

Sending the dividend lists & the traditional lists to the dividend paying bank.


Delivering the certificates, forms brochures, annual reports etc. to all the

issuing officers as per their requisitions.

Coordinate all the activities relating to procurement & issue of unit certificate.

Human Resource Department:Authentically the HR department is strategic. The prime objective of HR department

is to allocate human resources in different posts or departments in such a way where

maximum efficiency or output come from the employees. In this way, it ensures cost

minimization & profit maximization of the company.

In brief the functions of the HR department have been shown below:

To arrange different types of training program for the executives as well as for

the employees to get more output for them.

To find out the scope of foreign training for executives.

To arrange internal training for its employees.

To arrange training for the newly recruited employees of the organization.

To maintain the institutional training centre.

To arrange seminar, symposium, workshop etc & to bring expert in this

respect if t necessary.

To collect instruments & other materials for the participants of the training

programs to ensure their needs & requirements.

Personnel Department:It is also known as the administrative department of the IB. The objective of this

administrative department is to check & control the activities of employees & take

necessary actions if the rules & regulations of the company are violated. Strategic

plans are implemented through administrative department. The prime functions of this

department are as follows:

To prepare policies, laws & regulations to make more effective administration

system.

To recruit manpower for the corporation.

To transfer, promotion, fixing remuneration structure, vacations of employees

are also implemented through this department.

Pension & other related works after retirement like gratuity, provided fund etc

are also processed here.

To maintain constant communication with the ministry & monthly statement /

quarterly statement are sent according to the demand of the ministry.

To maintain al the activities regarding the union of the employees/ executives.

To maintain the attendance of the employees.


To implement other activities ascertained by the authority whenever it is

necessary.

Share Capital Ownership PatternClassification of Shareholders of ICB

Shareholding Position of ICB

Shareholders

No. of

Shareholders No. of Shares Percentage

Government of Bangladesh 1 1350000 27.00

Nationalized Commercial Banks4

1136900 22.74

Development Financial Institutions2

1281550 25.63

Insurance Corporations 2 617781 12.35

Denationalized Private Commercial

Banks2

454262.5 9.09

Private Commercial Banks 3 28286 0.57

Foreign commercial Banks 2 110 0.01

First Mutual Fund 1 5750 0.12

Other Institutions 12 17454 0.34

General Public 1109 107906 2.16

Total 1124 5000000 100.00

27%

23%26%

12%

9%

1% 0% 0% 0%2%

Shareholding Position of ICB Government of Bangladesh (27.0%)Nationalized commercial Banks (22.74%)Development Financial Inst. (25.63%)Insurance Corporation (12.35%)Denationalized Pvt. Comm. Banks (9.08%)Pvt. Comm. Banks (0.58%)Foreign Comm. Banks First Mutual fund (0.12%)Other Institutions (0.34%)General Public (2.16%)

Capital structure of ICB:


The particulars and capital structure of ICB are as follows:

Particulars ICBConsolidated

(ICB & Subsidiaries)

As on 30th June Increase/

(Decrease)

As on 30th June Increase/

(Decrease)

2010 2009 % 2010 2009 %

Paid up capital 50.00 50.00 ** 50.00 50.00 **

Reserves for stock

dividends

50.00 ** 55.00 **

Reserves 164.61 122.61 34.25 185.56 130.06 42.67

Retained Profit 16.33 13.82 18.16 73.52 36.43 101.81

Long term Govt.

loan

4.20 4.55 -7.69 4.20 4.55 -7.69

Debentures 31.80 41.80 -23.92 31.80 41.80 -23.92

Others 14.05 16.29 -13.75 16.39 17.18 -4.60

Total 330.99 249.07 32.89 416.47 280.02 48.73

Table: Capital structure of ICB

Following pie- charts are the presentation of above presented data:

Capital Structure of ICB as on 30th June,2010

Paid up capital

Reserves for stock dividends

Reserves

Retained Profit

Long term Govt. loan

Debentures

Others

Paid up capital

Reserves for stock dividends

Reserves

Retained Profit

Long term Govt. loan

Debentures

Others

Figure: Capital structure of ICB Figure: Consolidated (ICB & Subsidiaries)

2.7 SWOT Analysis of ICB:


On the basis of all collected data about ICB a SWOT model was been formulated to

find some strengths, weakness, opportunities & threats of ICB which seemed to me

relevant & important to note down. Following are the dioramic presentation of these

issues:

Performance Evaluation of ICB Mutual Funds

Strong Financial BackupExpert Management teamGood reputationDiversified Financial ProductStrong Network

Bureaucratic PracticeLack of DisciplineLack of Authority in officer LevelLack of computarizati0on systemInactive manpower

Govt trying to boost up capital marketas the corporate tax is reduced, more investors will come to set up new ventures.the economy is overcoming the September 11 crises.Investors are getting confidence over security markeets

A lot of private enterprise caters into the marketPeople have less knowledge about the capital market.There are some unethical practices in security markets.Low rate of dividend decleared by the companies.

Strength Weakness

OppourtunityThreats

19

Chapter: ThreeAbout Mutual Funds

3.1 Introduction to Mutual Funds:


A Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market

instruments such as shares, debentures and other securities. The income earned

through these investments and the capital appreciations realized are shared by its unit

holders in proportion to the number of units owned by them. Thus a Mutual Fund is

the most suitable investment for the common man as it offers an opportunity to invest

in a diversified, professionally managed basket of securities at a relatively low cost.

The flow chart below describes broadly the working of a Mutual Fund.

A Mutual Fund is a body corporate registered with the Securities and Exchange

Commission that pools up the money from individual/corporate investors and invests

the same on behalf of the investors/unit holders, in Equity shares, Government

securities, Bonds, Call Money Markets etc, and distributes the profits. In the other

words, a Mutual Fund allows investors to indirectly take a position in a basket of

assets.

Mutual Fund is a mechanism for pooling the resources by issuing units to the

investors and investing funds in securities in accordance with objectives as disclosed

in offer document. Investments in securities are spread among a wide cross-section of

industries and sectors thus the risk is reduced. Diversification reduces the risk because

all stocks may not move in the same direction in the same proportion at same time.

Investors of mutual funds are known as unit holders.

The investors in proportion to their investments share the profits or losses. The mutual

funds normally come out with a number of schemes with different investment

objectives which are launched from time to time. A Mutual Fund is required to be


registered with Securities Exchange Commission which regulates securities markets

before it can collect funds from the public.

3.2 Important Characteristics of a Mutual Fund A Mutual Fund actually belongs to the investors who have pooled their

Funds. The ownership of the mutual fund is in the hands of the Investors.

A Mutual Fund is managed by investment professional and other Service

providers, who earn a fee for their services, from the funds.

The pool of Funds is invested in a portfolio of marketable investments.

The value of the portfolio is updated every day.

The investor’s share in the fund is denominated by “units”. The value of the

units changes with change in the portfolio value, every day. The value of one

unit of investment is called net asset value (NAV).

The investment portfolio of the mutual fund is created according to The stated

Investment objectives of the Fund.

3.3 Types of Mutual Funds:

3.3.1 OPEN-ENDED MUTUAL FUNDS:

The holders of the shares in the Fund can resell them to the issuing Mutual Fund

Company at the time. They receive in turn the net assets value (NAV) of the shares at

the time of re-sale. Such Mutual Fund Companies place their funds in the secondary

securities market. They do not participate in new issue market as do pension funds or

life insurance companies. Thus they influence market price of corporate securities.

Open-end investment companies can sell an unlimited number of Shares and thus

keep going larger. The open-end Mutual Fund Company Buys or sells their shares.

These companies sell new shares NAV plus a Loading or management fees and

redeem shares at NAV. In other words, the target amount and the period both are

indefinite in such funds

3.3.2 CLOSED-ENDED MUTUAL FUNDS:

A closed–end Fund is open for sale to investors for a specific period, after which

further sales are closed. Any further transaction for buying the units or repurchasing

them, Happen in the secondary markets, where closed end Funds are listed. Therefore

new investors buy from the existing investors, and existing investors can liquidate

their units by selling them to other willing buyers. In a closed end Funds, thus the

pool of Funds can technically be kept constant. The asset management company

(AMC) however, can buy out the units from the investors, in the secondary markets,


thus reducing the amount of funds held by outside investors. The price at which units

can be sold or redeemed Depends on the market prices, which are fundamentally

linked to the NAV. Investors in closed end Funds receive either certificates or

Depository receipts, for their holdings in a closed end mutual Fund.

3.4 Advantages of Mutual Fund: Mutual Fund substantially minimizes the investment risk of small investors

through diversification in which funds are spread out into various sectors,

companies, securities as well as entirely different market.

Mutual Fund mobilizes the savings of small investor and channels them into

lucrative investment opportunities. As a result, Mutual Fund adds liquidity to

the market.

Mutual Fund provides small investor’s access to the whole market that an

individual level would be difficult if not impossible to achieve.

Because funds are professionally managed, investors are relieved from the

emotional strain associated with the day to day management of the fund. Thus

the fund provides access to extensive local research and investment

experience.

The investor saves a great deal in transaction costs given that she/he has

access to large number of securities by purchasing a single share of a Mutual

Fund.

Income will be tax free up to certain level, which is permitted as per Finance

Act.

Investment in the Fund would qualify for investment tax credit under section

44(2) of the Income Tax Ordinance 1984.

SEC regularly monitors the performance of such funds. The laws governing

mutual funds require exhaustive disclosures to the regulator and general public

and, as such mutual funds are one of the most transparent investment vehicles

in Bangladesh.

3.5 Organization and Management of Mutual Funds: In Bangladesh Mutual Fund usually formed as trusts, three parties are generally

involved-

Settler of the trust or the sponsoring organization.

The trust formed under the Trust Act, 1882.

Fund managers or The merchant-banking unit

Custodians.

Mutual Funds Trust:


Mutual fund trust is created by the sponsors under the Trust Act, 1882 which is the

main body in the creation of Mutual Fund trust.

The main functions and obligations of Mutual Fund trust are as follows:

(Name of the Trustee)..... Shall be the Trustee of the Fund by Virtue of this

Trust Deed.

Planning and formulating Mutual Funds schemes.

Seeking SEC’s approval and authorization to these schemes.

Marketing the schemes for public subscription.

The Trustee shall, as the guardian of the Fund hold all capital assets of the

Fund in trust for the benefit of the unit holders, in accordance with the

Securities and Exchange Commission (Mutual Fund) Rule 2001 and this

instrument of Trust and the unit holders shall preserve only the beneficial

interest in the Trust properties on pro rata basis of their ownership in the

specific scheme of the Fund.

The Trustee shall take all reasonable care to ensure that the schemes of the

mutual fund floated and managed by the Asset Management Company are in

accordance with the Trust Deed and the Securities and Exchange Commission

(Mutual Fund) Rule 2001.

The Trustee shall receive a quarterly report from the Asset Management

Company and submit a six monthly report to the Commission on the activities

of the schemes of the Mutual Fund.

The Trustee shall have the right to call for any books of accounts, records,

documents and such other information as considered necessary from the Asset

Management Company as is relevant to the management of the affairs

concerning the operation of the schemes of the Mutual Fund.

The Trustee shall not participate in any decision making process for

investments of the Fund and its various schemes.

The Trustee shall be paid an annual Trusteeship Fee of @.........% of the Net

Asset Value (NAV) of the Fund on semi-annual in advance basis, during the

life of the particular scheme or as may be agreed upon between the parties.

The Asset Management Company (AMC)


AMC has to discharge mainly functions as under:

Taking investment decisions and making investments of the funds through

market dealer/brokers in the secondary market securities or directly in the

primary capital market or money market instruments.

Realize fund position by taking account of all receivables and realizations,

moving corporate actions involving declaration of dividends, etc to

compensate investors for their investments in units; and

Maintaining proper accounting and information for pricing the units and

arriving at net asset value (NAV), the information about the listed schemes

and the transactions of units in the secondary market. AMC has to feed back

the trustees about its fund management operations and has to maintain a

perfect information system.

(Name of the AMC)....shall be the Asset Manager of the Fund and its various

schemes, this Deed shall constitute as the basis of the Investment Management

Agreement with the Trustee/Sponsor as required by the provision of the

Securities and Exchange Commission (Mutual Fund) Rule 2001.

The Asset Management Company shall be responsible for designing,

structuring, registering, promoting, issue & public floatation, investment

operation and management of the schemes of the mutual fund in accordance

with the provisions of the Trust Deed and the Securities and Exchange

Commission (Mutual Fund) Rule 2001.

The Asset Management Company shall submit to the Trustee and the

Commission quarterly activity and compliance reports on March 31, June 30,

September 30 and December 31 within fifteen days of the end of the quarter or

at such intervals as may be required by the Trustee or the Commission.

The Asset Management Company shall prepare and distribute prospectuses,

annual and periodical reports of the Fund and shall maintain all sorts of

communications with investors and other stakeholders as per the Securities

and Exchange Commission (Mutual Fund) Rule 2001 and shall undertake

advertising and other promotional activities.

The Asset Management Company shall be paid with an one-off Formation Fee

not exceeding one percent of the size of the schemes of the Fund and also the

annual Management Fee as per and under the limits prescribed in the

Securities and Exchange Commission (Mutual Fund) Rule 2001 or as

determined by the Commission from time to time.


A requisition meeting called by two-third majority of the unit holders of any

scheme of the Fund, under the procedure laid down in the Securities and

Exchange Commission (Mutual Fund) Rule 2001 can propose termination of

the appointment of the Asset Management Company for that particular scheme

of the Fund, and the Trustee may initiate termination process of the Asset

Management Company with prior approval of the Commission.

Custodians of mutual funds:

Responsibilities of custodians are:-

Receipt and delivery of securities

Holding of securities

Collecting income

Holding and processing cost

(Name of the Custodian)....) shall be the Custodian of the Fund and its various

Schemes as per the Securities and Exchange Commission (Mutual Fund) Rule

2001.

The Custodian shall keep liaison with the CDBL and collect and preserve

information required for ascertaining the movement of securities of the Fund.

The Custodian shall keep the securities of the Fund in safe and separate

custody and shall provide highest security for the assets of the Fund.

The Custodian, among others, shall preserve the following documents and

information as applicable as regards to the Fund:

a) Details of acquisition and disposal of securities under

custody;

b) Details of receipt and disbursement of funds;

c) Details about the right of the clients on the securities held

on behalf of the clients:

d) Details of registration of the securities, if any; under

custody.

e) Ledger of accounts of the clients;

f) Details about the order received from and given to the

clients;

The Custodian shall have physical possession of the stock and securities of the

Fund and be responsible for safekeeping of the securities. Applicable

negotiated custodial service charges shall be paid to the Custodian by the


Fund, which shall be competitive and market based and disclosed on the

prospectus of the respective schemes.

The Custodian shall also be responsible for the settlement, transfer and

registration, dividend collection and corporate announcement dissemination

services.

The Custodian shall furnish to the Asset Management Company the interest

that they may have in any company or financial institution or anybody

corporate by virtue of their positions as director, partner, and managers or in

which they may be associated with in other capacities.


Chapter: FourPerformance Evaluation of ICB Mutual

Funds


4. Performance Evaluation of ICB Mutual

Funds

4.1 Mutual Funds of ICB:ICB pioneered the Mutual Fund industry in Bangladesh. Country’s first Mutual Fund

the “First ICB Mutual Fund” was floated on 25 th April 1980. Since then, ICB has,

over the year, floated 8 Mutual Funds with the total capital of TK. 17.50 crore. All

ICB mutual funds are closed-end mutual funds. ICB Mutual Fund continued to

command the confidence and attention of investors as lucrative and rewarding

investment in terms of steady dividend performance.

ICB launched eight mutual funds in different period with different paid up capital

MUTUAL FUND DATE OF

FLOATATION

PAID UP CAPITAL

(Taka in Lac)

First ICB Mutual Fund 25 April,1980 75.00

Second ICB Mutual Fund 17 June, 1984 50.00

Third ICB Mutual Fund 19 May, 1985 100.00

Fourth ICB Mutual Fund 06 June, 1985 100.00

Fifth ICB Mutual Fund 08 June, 1987 150.00

Sixth ICB Mutual Fund 16 May, 1988 500.00

Seventh ICB Mutual Fund 30 June, 1995 300.00

Eighth ICB Mutual Fund 23 July, 1996 500.00

Advance against Mutual Fund certificates Scheme

Advance against ICB Mutual Fund certificates Scheme was introduced in 2003,

designed for the ICB Mutual Fund certificate holders to meet their emergency fund

requirement. One can borrow maximum of 50% value of last one year’s weighted

average market price of certificates at time of borrowing by depositing hid/her

certificates under lien arrangement from any of the ICB offices. The rate of interest on

the lone is reasonable and also competitive.

Management Fee Charge etc.

At present management fee @ 1% on the paid up capital of the Fund is charged

annually. No amount charged on account of custodial and trust services. Part of the

operating experience are charged to the respective Mutual Fund on pro rata basis.


Assets of ICB Mutual Funds

ICB Mutual Fund certificate holders shall have unfettered ownership into assets of the

Fund to which they are related. In case of winding up of the corporation the assets

belonging to any ICB Mutual Fund shall not be traded as the assets of the corporation.

Tax Concessions

(a) Investment in certificates provides the same tax exemptions as an investment

qualifying under section 44 of the Income Tax Ordinance 1984.

(b) Capital gains received on investment in the Fund Certificates shall not be

included in the total income of a certificates holder within the limited specified

in the Income Tax Ordinance 1984.

(c) Dividends received on investment in the Fund will be treated as dividend

income under Income Tax Act, and will be exempted from tax with the limited

specified in the Act.

(d) The Funds incomes are to be exempted from all taxes as granted by the

Government as per SRO No. 80-L/80 dated April 1980.

Management of the Funds

There is decision making board in order to manage different Mutual Funds. As per

board’s decision securities are bought under different Mutual Funds. At the same way

securities are sold. In case of new Mutual Fund subscribes for public issue. ICB

authority is made portfolio earlier by its own finance and given it name. After that it is

published on any newspaper as prospectus. By studying this prospectus public

response whether they will buy the Mutual Fund or not.

Declaration of Dividend:

The net income received on investments of Funds on account of dividend, bonus,

interest, capital gain etc are distributed amongst the certificate holders as per decision

of the Board of Directors of ICB. Board declares such income in the form of dividend

at end of July each year. Dividend declared by ICB in the past for the Mutual Funds

were very attractive. The year-wise per certificate dividends performance are

mentioned in the next page:


Dividend per Certificate (Taka)

FY

FUNDS

1ST 2ND 3RD 4TH 5TH 6TH 7TH 8TH

1981 20

1982 20

1983 20

1984 25

1985 35 21

1986 38 23 21

1987 41 25.5 22.5 21.5

1988 48 28 25.5 23

1989 49 29 26 23.5 20.5 15.5

1990 49 29 26 23.5 20.5 13.25

1991 35 22 19 17 10 6

1992 31 22 19 18 11 6

1993 31.5 21 18 17 12

1994 45 27 22 40 25 16

1995 50 40 27 41 28 18

1996 60 42 28 41 30 20 18

1997 70 45 38 45 35 24 21 18

1998 70 30 35 32 22 18 14 12

1999 100 32 38 35 20 15 13 12

2000 125 35 40 36 21 16 13.5 12.5

2001 170 40 45 38 23 17 14 13

2002 175 42 50 40 24 17.5 14.5 13.5

2003 180 45 50 40 24 17.5 14.5 13.5

2004 200 50 50 45 24 17.5 15 14

2005 210 55 52 48 27 18.5 16 15

2006 210 55 52 48 27 18.5 16 15

2007 190 62 56 52 33 23 22.5 18

2008 265 75 65 60 45 30 30 25

2009 310 95 85 80 56 37 35 32

2010 400 200 140 125 100 75 70 65

NAV per certificate:


NAV (AT COST PRICE) 2005 2006 2007 2008 2009 AS ON 06.09.2010

1st ICB M.F. 766.18 785.90 816.72 748.84 869.08 885.18

2nd ICB M.F. 335.45 346.49 367.65 412.79 473.34 607.47

3rd ICB M.F. 256.91 271.02 288.12 324.99 381.38 494.29

4th ICB M.F. 270.78 276.48 291.58 325.32 379.59 455.59

5th ICB M.F. 158.58 165.01 179.01 210.27 243.83 315.98

6th ICB M.F. 129.65 135.69 143.23 162.87 182.87 188.31

7th ICB M.F. 129.41 139.07 150.60 170.95 190.95 237.19

8th ICB M.F. 128.86 133.77 140.90 158.60 176.45 212.31

NAV(AT MARKET

PRICE)

2005 2006 2007 2008 2009 AS ON 06.09.2010

1st ICB M.F. 2761.20 2269.54 3217.58 4461.15 6172.15 11078.99

2nd ICB M.F. 391.55 286.66 480.33 1005.52 1484.00 3581.01

3rd ICB M.F. 312.39 231.49 415.05 807.94 1122.13 2700.72

4th ICB M.F. 345.99 250.44 586.36 978.45 1251.92 2961.11

5th ICB M.F. 234.12 150.83 508.06 998.05 1189.27 2337.24

6th ICB M.F. 141.67 110.27 196.03 345.51 454.78 838.64

7th ICB M.F. 166.56 90.84 271.70 503.42 694.21 1367.63

8th ICB M.F. 153.76 99.85 215.35 401.37 513.72 987.59

4.2 Performance Measures of Mutual Funds:Mutual Fund industry today, has about 29 players among them 27 are traded in Dhaka

Stock Exchange. However, with a plethora of schemes to choose from, the retail

investor faces problems in selecting funds. Factors such as investment strategy and

management style are qualitative, but the funds record is an important indicator too.

Though past performance alone cannot be indicative of future performance, it is,

frankly, the only quantitative way to judge how good a fund is at present. Therefore,

there is a need to correctly assess the past performance of different Mutual Funds.

Worldwide, good Mutual Fund companies over are known by their AMC’s and this

fame is directly linked to their superior stock selection skills.

For Mutual Funds to grow, AMC’s must be held accountable for their selection of

stocks. In other words, there must be some performance indicator that will reveal the

quality of stock selection of various AMC’s.

Return alone should not be considered as the basis of measurement of the

performance of a Mutual Fund scheme, it should also include the risk taken by the


fund manager because different funds will have different levels of risk attached to

them. Risk associated with a fund, in a general, can be defined as Variability or

fluctuations in the returns generated by it. The higher the fluctuations in the returns of

a fund during a given period, higher will be the risk associated with it. These

fluctuations in the returns generated by a fund are resultant of two guiding forces.

First, general market fluctuations, which affect all the securities, present in the

market, called Market risk or Systematic risk and second, fluctuations due to specific

securities present in the portfolio of the fund, called Unsystematic risk. The Total

Risk of a given fund is sum of these two and is measured in terms of standard

deviation of returns of the fund.

Systematic risk, on the other hand, is measured in terms of Beta, which represents

fluctuations in the price of the fund vis-à-vis market. The more responsive the price of

a Mutual Fund is to the changes in the market; higher will be its beta. Beta is

calculated by relating the returns on a Mutual Fund with the returns in the market.

While Unsystematic risk can be diversified through investments in a number of

instruments, systematic risk cannot. By using the risk return relationship, we try to

assess the competitive strength of the Mutual Funds one another in a better way. In

order to determine the risk-adjusted returns of investment portfolios, several eminent

authors have worked since 1960s to develop composite performance indices to

evaluate a portfolio by comparing alternative portfolios within a particular risk class.

Measures of Performance:The most important and widely used measures of performance are as follows:

The Treynor’Measure

The Sharpe Measure

Jensen Model

Fama Model

4.2.1 Treynor’s composite performance measure:


Return

reReturn

Beta1.00

SML

Tm

0.00

Rm

This measure indicates the portfolio’s risk premium return per unit of risk. Here risk

premium is measured by subtracting from the average rate of return for portfolio i

during a specified time period, the average rate of return on a risk free investment

during that time period. Risk is measured by beta.

where:

Ri = average rate of return for portfolio i during a specified time period

RFR = the average rate of return on a risk free investment during that time

period

Bi = the slope of the fund’s characteristic line during the time period (this

indicates the portfolio’s relative volatility.)

In this way mutual funds providing highest return per unit of risk (systematic) will be

preferred in comparison to the funds that provide lower return per unit of risk.

Comparing a portfolio’s T value to a similar measure for the market portfolio

indicates whether the portfolio would plot above the SML.

4.2.1.1 1st ICB Mutual Fund:


The results of the calculations are summarized below

Covariance of 1st ICB Mutual Fund return with market return 0.0019

Variance of market return 0.0067

Beta of 1st ICB Mutual Fund 0.2851

Average monthly return of 1st ICB Mutual Fund 0.0259

Average monthly Risk free return 0.0066

Ti 0.0676

The beta is .2851, which means for market movement of 1 this Mutual Fund moves

only .2851 which is low. Because of this low systematic risk, the risk adjusted return

showed by Treynor is quite high. The result indicates that 1st ICB Mutual Fund

obtained 6.76% risk premium per unit of systematic risk. If we compare this result

with market Treynor ratio which is 1.46% we find that 1st ICB Mutual Fund has

performed better than market and it plots above the SML.

4.2.1.2 2nd ICB Mutual Fund:


Covariance of 2nd ICB Mutual Fund return with market return 0.0023


Beta of 2nd ICB Mutual Fund 0.3364

Average return of 2nd ICB Mutual Fund 0.03405

Average Risk free return 0.00659

Ti 0.0816

We can see that beta is low like the previous one and is only .33641, which means for

market movement of 1 this mutual fund moves only .3364 which is low. Because of

this low systematic risk the risk adjusted return showed by Treynor is quite high. The

result indicates that 1st ICB Mutual Fund obtained 8.16% risk premium per unit of

systematic risk. If we compare this result with market Treynor ratio which is 1.46%

we find that 2nd ICB Mutual Fund has performed better than market and it plots above

the SML.

4.2.1.3 3rd ICB Mutual Fund:



Covariance of 3rd ICB Mutual Fund return with market return 0.0020


Beta of 3rd ICB Mutual Fund 0.3034

Average return of 3rd ICB Mutual Fund 0.0218


Ti 0.0502

We can see that beta is .3034, which means for market movement of 1 this security

moves only .3034 which is low. Because of this low systematic risk the risk adjusted

return showed by Treynor is quite high. The result indicates that 3rd ICB Mutual

Fund obtained 5.02% risk premium per unit of systematic risk. If we compare this

result with market Treynor ratio which is 1.46% we find that 3rd ICB Mutual Fund

has performed better than market and it plots above the SML.

4.2.1.4 4th ICB Mutual Fund:


Covariance of 4th ICB Mutual Fund return with market return 0.0027


Beta of 4th ICB Mutual Fund 0.4029

Average return of 4th ICB Mutual Fund 0.0290


Ti 0.0555



return showed by Treynor is quite high. The result indicates that 4th ICB Mutual Fund


with market Treynor ratio which is 1.46% we find that 4th ICB Mutual Fund has










Ti 0.0640




obtained 6.4% risk premium per unit of systematic risk. If we compare this result with

market Treynor ratio which is 1.46% we find that 5th ICB Mutual Fund has









Ti 0.0705















Ti 0.1532














Ti 0.0772







Performance Compared on the basis of Treynor ratio:


Following is the treynor ratio organized from highest to lowest for the mutual funds

that are being traded since 2005 or before.

1st BSRS M.F. 0.15636

7th ICB M.F. 0.153215

2nd ICB M.F. 0.081624

8th ICB M.F. 0.077173

6th ICB M.F. 0.070523

1st ICB M.F. 0.067636

5th ICB M.F. 0.063983

Aims 1st M.F. 0.059364

4th ICB M.F. 0.055498

Grameen M.F. one 0.053388

3rd ICB M.F. 0.0502

ICBAMCL 1st M.F. 0.030859

ICB AMCL 1st Islamic M.F. 0.026918

We can see that 1st BSRS M.F and 7th ICB M.F. performed significantly better than

others. And another side is that ICB mutual funds performed well as a whole than

others although the first position is occupied by 1st BSRS M.F

4.2.2 Sharpe Portfolio Performance Measure:


This measure indicates the portfolio’s risk premium return per unit of total risk. Here

risk premium is measured by subtracting from the average rate of return for portfolio i

during a specified time period, the average rate of return on a risk free investment

during that time period. Total risk is measured by standard deviation of portfolio

return.

Where

Ri = average rate of return for portfolio i during a specified time period

RFR = the average rate of return on a risk free investment during that time

period

= the standard deviation of the rate of return for portfolio i during the

time period.

An asset’s Sharpe measure in isolation means little. It must be measured against the

market’s Sharpe measure. The market Sharpe measure is calculated the same way, by

dividing the market risk premium, or the return on the market minus the risk-free rate

by the standard deviation of the market. If the asset’s Sharpe measure is greater than

the market’s Sharpe measure, the asset has outperformed on a risk-adjusted basis. In

these way mutual funds providing highest return per unit of risk (total) will be

preferred in comparison to the funds that provide lower return per unit of risk.



Average Return of 1st ICB Mutual Fund 0.0259

Average Risk-free Return 0.0066

Standard deviation of Return of 1st ICB Mutual Fund 0.1074

Si 0.1796

The excess return per unit of total risk is 17.96%. If we compare this result with

market Sharpe ratio which is 17.72% we find that 1st ICB Mutual Fund has

performed slightly better than market and it plots above the CML.




Average Return of 2nd ICB Mutual Fund 0.0341


Standard deviation of Return of 2nd ICB Mutual Fund 0.1656

Si 0.1658


market Sharpe ratio which is 17.72% we find that 2nd ICB Mutual Fund performance

was inferior to the market performance and it plots below the CML.



Average Return of 3rd ICB Mutual Fund 0.0218


Standard deviation of Return of 3rd ICB Mutual Fund 0.1215

Si 0.1254


market Sharpe ratio which is 17.72% we find that 3rd ICB Mutual Fund performance

was well below than the market performance and it plots well below the CML.



Average Return of 4th ICB Mutual Fund 0.0290


Standard deviation of Return of 4th ICB Mutual Fund 0.1209

Si 0.1849


market Sharpe ratio which is 17.72% we find that 4th ICB Mutual Fund performance

was above than the market performance and it plots above the CML.







Si 0.1926



was well above than the market performance and it plots well above the CML.






Si 0.1583



was below than the market performance and it plots below the CML.






Si 0.1629










Si 0.1659




Performance Compared on the basis of Sharpe ratio:Following is the Sharpe ratio organized from highest to lowest for the mutual funds

that are being traded since 2005 or before.

Aims 1st M.F. 0.2393

1st BSRS M.F. 0.2308

Grameen M.F. one 0.2153

5th ICB M.F. 0.1926

4th ICB M.F. 0.1849

1st ICB M.F. 0.1796

8th ICB M.F. 0.1659

2nd ICB M.F. 0.1658

7th ICB M.F. 0.1629

6th ICB M.F. 0.1583

ICBAMCL 1st M.F. 0.1396

3rd ICB M.F. 0.1254

ICB AMCL 1st Islamic M.F. 0.105

From the perspective of total risk the excess return per unit of risk is lower than

market for most of the Mutual Funds that means most of the Mutual Funds

underperformed in comparison to market. Excess return per unit of total risk is highest

for 1st BSRS M.F, then for Aims 1st M.F, then for Grameen M.F. one, then for 5th

ICB M.F and so on as indicated by Sharpe ratio. As we know risk-averse investor

who makes decision only in terms of mean excess return and standard deviation prefer

Mutual Fund with higher ratio, so they may choose any of the mentioned three. If we


take a closer look we can see that w 1st BSRS M.F, Grameen M.F. one, Aims 1st M.F

all had both highest standard deviation and highest return. This means price

fluctuation for them was very high but the return well compensated for the risk

4.2.3 Jensen Portfolio Performance measure:Jensen measure is based on capital asset pricing model (CAPM). All versions of the

CAPM calculate the expected one-period return on any security or portfolio by the

following expression.

E(Ri) = Rf + ßi[E(Rm) - Rf]

Where

E(Ri) = the expected return on portfolio or security i

Rf = the one period risk free interest rate

ßi = the systematic risk for portfolio or security i

E(Rm) = the expexted return on the market portfolio of risky assets

Assuming that the asset pricing model is empirically the equation can be expressed in

terms of realized rate of return as follows:

E(Ri) = Rf + ßi[E(Rm) - Rf] + e

This equation states that the realized rate of return on a security or portfolio during a

given time period should be a linear function of the risk-free rate of return during the

period, plus a risk premium that depends on the systematic risk of the security or

portfolio during the period plus a random error term (e)

Subtracting the risk-free return from both side we get

E(Ri) - Rf = ßi[E(Rm) - Rf] + e

This shows that the risk premium earned on the ith portfolio is equal to ßi times a

market risk premium plus a random error term. In this form an intercept for the

regression is not expected if all assets and portfolio were in equilibrium.

Alternatively, superior portfolio managers who forecast market turns or consistently

select undervalued securities earn higher premiums than those implied by this model.

Specifically superior portfolio managers have consistently positive random error

terms because the actual returns for their portfolios consistently exceed the expected

returns implied by this model. To detect and measure this superior performance one

must allow for an intercept that measures any positive or negative difference from the

model. Consistent positive performance causes a positive intercept, whereas


continuous inferior performance causes a negative intercept. With an intercept or

nonzero constant, earlier equation becomes

E(Ri) - Rf = αi + ßi[E(Rm) - Rf] + e

In this equation α value indicates whether the portfolio manager is superior or inferior

in market timing and/or selection. A superior manager has a significant positive α

value.

The performance of a portfolio manager with no forecasting ability but not clearly

inferior equals that of a naive buy-and-hold policy. In the equation, because the rate of

return on such a portfolio typically matches the return that is expected, the residual

returns generally are randomly positive or negative. This gives a constant term that

differs insignificantly from zero, indicating that the portfolio manager basically

matches the market on a risk adjusted basis.


The summery of the results of the calculation is summarized below:

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.225408

R Square 0.050809

Adjusted R Square 0.034443

Standard Error 0.105632

Observations 60

ANOVA

df SS MS F Significance

F

Regressio

n 1 0.034642

0.03464

2 3.104639 0.083339

Residual

58 0.647169

0.01115

8

Total 59 0.681811

Coefficient

s

Standard

Error

t Stat P-value Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept

0.015006

0.01385

1

1.08339

4

0.28311

7 -0.01272

0.04273

2 -0.01272

0.04273

2


X

Variable

1 0.293785

0.16673

4

1.76199

9

0.08333

9 -0.03997

0.62753

9 -0.03997

0.62753

9

We can derive the equation from the results

E(Ri) - Rf = 1.5% + .29[E(Rm) - Rf]

Here from the equation we find that intercept is 1.5%. Which says that the portfolio

earned 1.97% excess return than the expected return by CAPM. But the question is

whether the excess return is statistically significant.

The null hypothesis: α = 0

The alternative hypothesis: α not equal to 0

The t value is 1.083 and that table value for 59 degree of freedom at 10% level of

significance is 1.671. So we can not reject null hypothesis. So we can say that the

excess return is random not significant.



SUMMARY OUTPUT


Multiple R 0.170811994

R Square 0.029176737

Adjusted R

Square

0.012438405


Observations 60

ANOVA

df SS MS F Significanc

e F

Regressio

n

1 0.04722 0.0472

2

1.74310

9

0.1919320

76

Residual 58 1.57119

9

0.0270

9

Total 59 1.61841

9

Coefficients Standard t Stat P-value Lower 95% Upper Lower Upper


Error 95% 95.0% 95.0%

Intercept 0.022469058 0.021582 1.0411 0.30215 -

0.020732092

0.06567 -

0.02073

0.06567

X

Variable

1

0.342999068 0.259795 1.320269 0.19193

2

-

0.177036978

0.863035 -

0.17704

0.863035


E(Ri) - Rf = 2.25% + .3430[E(Rm) - Rf]








excess return is random, not significant.



SUMMARY OUTPUT


Multiple R 0.211666

R Square 0.044802

Adjusted R

Square

0.028334


Observations 60

ANOVA

df SS MS F Significan

ce F

Regressi

on

1 0.0390812

83

0.03908

1

2.72042

3

0.104478

Residual 58 0.8332213 0.01436

6


Total 59 0.8723025

83

Coefficient

s

Standard

Error


95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept 0.010691 0.01571654

8

0.68022

8

0.49906

6

-

0.0207

7

0.04215

1

-

0.0207

7

0.04215

1

X

Variable

1

0.312042 0.18918874

9

1.64937 0.10447

8

-

0.0666

6

0.69074

5

-

0.0666

6

0.69074

5


E(Ri) - Rf = 1.06% + .3120[E(Rm) - Rf]






The t value is .6802 and that table value for 59 degree of freedom at 10% level of





SUMMARY OUTPUT


Multiple R 0.281088

R Square 0.079011

Adjusted R

Square

0.063131


Observations 60

ANOVA



ce F

Regressi

on

1 0.0683

11

0.0683

11

4.9757

48

0.029588

Residual 58 0.7962

73

0.0137

29

Total 59 0.8645

84

Coefficien

ts

Standar

d Error t Stat P-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Interce

pt 0.016358

0.01536

4

1.06471

2

0.29141

9 -0.0144

0.04711

3 -0.0144

0.04711

3

X

Variabl

e 1 0.412549

0.18494

6

2.23063

8

0.02958

8

0.04233

8

0.78275

9

0.04233

8

0.78275

9


E(Ri) - Rf = 1.64% + .4125[E(Rm) - Rf]


earned 1.06% excess return than the expected return by CAPM? But the question is









SUMMARY OUTPUT


Multiple R 0.252395

R Square 0.063703

Adjusted R

Square

0.04756


Observations 60


ANOVA


ce F

Regressi

on

1 0.1027

75

0.1027

75

3.9461

65

0.05171

Residual 58 1.5105

71

0.0260

44

Total 59 1.6133

46

Coefficient

s

Standard

Error


95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept 0.02448 0.02116

2

1.15683

8

0.25208

1

-

0.0178

8

0.06684 -

0.0178

8

0.06684

X

Variable 1

0.506026 0.25473

3

1.98649

6

0.05171 -

0.0038

8

1.01593

1

-

0.0038

8

1.01593

1


E(Ri) - Rf = 2.45% + .506[E(Rm) - Rf]











SUMMARY OUTPUT


Multiple R 0.188279


R Square 0.035449

Adjusted R

Square

0.018819


Observations 60

ANOVA


ce F

Regressi

on

1 0.05524

3

0.05524

3

2.1316

1

0.149685

Residual 58 1.50313

8

0.02591

6

Total 59 1.55838

2

Coefficient

s

Standard

Error


95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept 0.020342 0.021109 0.96365

8

0.33921

8

-

0.0219

1

0.06259

7

-

0.0219

1

0.06259

7

X

Variable 1

0.370995 0.254106 1.46000

3

0.14968

5

-

0.1376

5

0.87964

3

-

0.1376

5

0.87964

3


E(Ri) - Rf = 2.03% + .37[E(Rm) - Rf]






The t value is .963 and that table value for 59 degree of freedom at 10% level of






SUMMARY OUTPUT


Multiple R 0.089354

R Square 0.007984

Adjusted R

Square

-0.00912


Observations 60

ANOVA


ce F

Regressi

on

1 0.0278

86

0.0278

86

0.4668

06

0.497181

Residual 58 3.4648

33

0.0597

38

Total 59 3.4927

19

Coefficient

s

Standard

Error


95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercep

t

0.035806 0.03204

9

1.11723

1

0.26850

2

-

0.0283

5

0.09996 -

0.0283

5

0.09996

X

Variable

1

0.263587 0.38579

5

0.68323

2

0.49718

1

-

0.5086

6

1.03583

9

-

0.5086

6

1.03583

9


E(Ri) - Rf = 3.58% + .2635[E(Rm) - Rf]












SUMMARY OUTPUT


Multiple R 0.180548

R Square 0.032598

Adjusted R

Square

0.015918


Observations 60

ANOVA


ce F

Regressi

on

1 0.0569

71

0.0569

71

1.9543

66

0.167441

Residual 58 1.6907

34

0.0291

51

Total 59 1.7477

05

Coefficient

s

Standard

Error


95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercep

t

0.023067 0.02238

8

1.03032

7

0.30713

4

-

0.0217

5

0.06788

1

-

0.0217

5

0.06788

1

X

Variable

1

0.376752 0.26949

6

1.39798

7

0.16744

1

-0.1627 0.91620

8

-0.1627 0.91620

8


E(Ri) – Rf = 2.30% + .3767[E(Rm) – Rf]










4. 2.4 Fama’s performance measureFama breaks performance by a portfolio manager into two categories: selectivity and

diversification. Fama’s measure incorporates measures for managing both systematic

and unsystematic risk.

Selectivity: measures the ability of the portfolio manager to earn a return that is

consistent with the portfolio’s market (systematic) risk. The selectivity measure is:

( Ri−( R f+β i( Rm−R f ))(+) selectivity indicates that the manager earned a higher return than the systematic

risk of the portfolio would indicate. Basically, we are just comparing the return on

the asset with the return earned by the CAPM.

Diversification: Diversification measures the extent to which the portfolio may not

have been completely diversified. Diversification is measured as:

(R f+( Rm−R f )σ i

σm)−( Rf +(Rm−R f )β i )

If the portfolio is completely diversified, contains no unsystematic risk, then

diversification measure would be zero. A positive diversification measure indicates

that the portfolio is not completely diversified; it would contain unsystematic risk. If

the diversification measure is positive, it represents the extra return that the portfolio

should earn for not being completely diversified

Net Selectivity: Net selectivity = selectivity – diversification


Net selectivity measures how well the portfolio manager did at earning a fair return

for the portfolio’s systematic risk and how well the portfolio manager did at

diversifying away unsystematic risk. Positive net selectivity indicates the portfolio

manager did a good job. Negative net selectivity indicates that the portfolio manager

did a poor job.

4.2.4.1 Net selectivity results:Net selectivity results are presented below in a descending order:

Aims 1st M.F. 0.01702

3

1st BSRS M.F. 0.01546

4

5th ICB M.F. 0.00253

4

4th ICB M.F. 0.00092

5

1st ICB M.F. 0.00024

9

2nd ICB M.F. -0.0019

8th ICB M.F. -

0.00196

6th ICB M.F. -

0.00308

7th ICB M.F. -

0.00349

ICBAMCL 1st M.F. -

0.00554

3rd ICB M.F. -0.0063

Grameen M.F. one -

0.00663

ICB AMCL 1st Islamic

M.F.

-

0.01351

From the table above we can see that 62 % of the mutual funds did not have any net

selectivity. Only five Mutual Funds had superior security selection. In calculation we

found that all of them had positive selectivity before adjusting for diversification.

That means they earned more than what their systematic risk suggested. Their actual

excess return was higher than expected excess return. But after adjustment for


diversification eight of them turn out to be negative. According to the finding Aims

1st M.F., 1st BSRS M.F, 5th ICB M.F, 4th ICB M.F and 1st ICB M.F. had net

selectivity. That means their mangers could do superior security selection.

Chapter: FiveFindings, Recommendations &

Conclusion


5. Findings, Recommendations & Conclusion

5.1 Findings of the Report:If want to have an overall view rather than segregated performances regarding various

measures we have to on all of the together. Following are the major findings.

Mutual Fund Treynor Sharp

e

Alpha Net

Selectivity

Beta Std Ri- Rf

1st ICB M.F. 0.0676 0.1796 Insignificant 0.000249 0.2851 0.1074 0.0193

2nd ICB M.F. 0.0816 0.1658 Insignificant -0.001900 0.3364 0.1656 0.0275

3rd ICB M.F. 0.0502 0.1254 Insignificant -0.006303 0.3034 0.1215 0.0152

4th ICB M.F. 0.0555 0.1849 Insignificant 0.000925 0.4029 0.1209 0.0224

5th ICB M.F. 0.0640 0.1926 Insignificant 0.002534 0.4977 0.1654 0.0318

6th ICB M.F. 0.0705 0.1583 Insignificant -0.003075 0.3650 0.1626 0.0257



Aims 1st M.F. 0.0594 0.2393 Insignificant 0.017023 1.1052 0.2741 0.0656

Grameen M.F.

one

0.0534 0.2153 Insignificant -0.006629 0.8992 0.2229 0.0480

ICB AMCL 1st

Islamic M.F.

0.0269 0.1050 Insignificant -0.013513 0.7296 0.1871 0.0196

ICBAMCL 1st

M.F.

0.0309 0.1396 Insignificant -0.005545 0.6653 0.1471 0.0205

1st BSRS M.F. 0.1564 0.2309 Insignificant 0.015464 0.4257 0.2883 0.0666


We can see from the perspective of market risk the excess return per unit of risk is

highest for 1st BSRS M.F, then for 7th ICB M.F, then for 2nd ICB M.F and so on as

indicated by Treynor ratio. As we know risk-averse investor who makes decision only

in terms of mean excess return and beta prefer Mutual Fund with higher ratio, so they

may choose any of the mentioned three.

If we take a closer look we can see that when only the excess return is considered the

highest return is given by 1st BSRS M.F, then by Aims 1st M.F then by Grameen

M.F. one then by 5th ICB M.F and so on. But when we took risk into consideration

the comparatively higher risk of Aims 1st M.F and Grameen M.F. one pushed them

down in ranking.

From the perspective of total risk the excess return per unit of risk is lower than

market for most of the Mutual Funds that means most of the Mutual Funds

underperformed in comparison to market. Excess return per unit of total risk is highest

for 1st BSRS M.F, then for Aims 1st M.F, then for Grameen M.F. one, then for 5th

ICB M.F and so on as indicated by Sharpe ratio. As we know risk-averse investor

who makes decision only in terms of mean excess return and standard deviation prefer

Mutual Fund with higher ratio, so they may choose any of the mentioned three.

If we take a closer look we can see that w 1st BSRS M.F, Grameen M.F. one, Aims

1st M.F all had both highest standard deviation and highest return. This means price

fluctuation for them was very high but the return well compensated for the risk.

When considered from the perspective of excess return than expected by CAPM we

found that all of the Mutual Funds had some excess return but when tested for

significance we found that none was significant. So no clear preference can be

concluded.

From the table above we can see that 62 % of the mutual funds did not have any net

selectivity. Only five Mutual Funds had superior security selection. In calculation we

found that all of them had positive selectivity before adjusting for diversification.

That means they earned more than what their systematic risk suggested. Their actual

excess return was higher than expected excess return. But after adjustment for

diversification eight of them turn out to be negative. According to the finding Aims

1st M.F., 1st BSRS M.F, 5th ICB M.F, 4th ICB M.F and 1st ICB M.F. had net

selectivity. That means their mangers could do superior security selection. And the

best net selectivity is provided by Aims 1st M.F, then by 1st BSRS M.F and then by

5th ICB M.F.


Overall we can see 1st BSRS M.F, Aims 1st M.F and 5th ICB M.F are performing

better related to other Mutual Funds.

This study was affected by one factor and that is mutual funds are less frequently

traded in our country so beta showed unusually low figures. I believe this limitation

may change interpretations for individual securities but will not affect comparative

results.

5.2 Recommendations:Some mutual funds of ICB look well performing by general observation, but after analyzing we can see a different scenario. In this situation, authority of ICB should consider some factors for getting better performance from its mutual funds. The factors are as follows:

Funds managers should focus especially on the 4th, 5th, 6th, 7th and 8th Mutual fund because their EPS, DPS are not satisfactory. Management should analyze the internal and external factors that can affect the performance of the funds.

For high amount of reserve from the current income, the present investors are being deprived, so the management should keep minimum reserve in consistent with the net assets value.

As ICB mutual funds are close end fund, it cannot run forever. So the management should take decision regarding its redemption period.

As the cost price is greater than market price of some portfolios of the funds, fund manager should efficiently manage those portfolios.

Manager should maintain the consistency of the assets value with the market price so that the investors can be ensured their environment.

Fund manager should consider the reshuffling system and trading of funds portfolio.

ICB might float more mutual funds which could protect the capital market from struggling if it would have floated some more funds, than it could hold more stock and the investors might have more confidence on capital market. Because it can protect the small and young investors from losing their money for any unusual behavior of the capital market, which was happened in 1996.


Now a day, banking sector is less risky sector to invest because historically the sector has been performing good, and providing regular dividend ICB’S mutual funds should have highest investment in this sector.

Mutual funds should have separate trustee, custodian and sponsor and portfolio manager.

Employees should set up proper position according their skill and educational background.

Dividend policy should be fair to all funds so that the investors become satisfied. Dividend policy should be earning basis, not year basis.

Investing by costly borrowing funds should be reduced. Management may look for source of less costly funds and reduce expense & increase income.

Investment in any company’s shares will need to proceed with conscious & investors’ interest, should the first priority.

More employees should be recruited for better service.

Employees should set up proper positioned according to their skills and educational background.

Mutual fund department should be shifted to head office.

Mutual fund department should be monitored and evaluated properly.

5.3 ConclusionInvestment Corporation of Bangladesh (ICB) is a pioneer investment Bank of our country. It is playing a vital role for the development of the country’s capital market. ICB is a major organization of the country to perform the activities by creating demand for securities and on the other hand to ensure the supply of securities in the capital market. The flotation of mutual funds and issuance of unit certificates by the ICB strengthens the supply of attractive securities in our capital market. ICB has a great opportunity to get better performance from its mutual funds. For this reason, mutual fund management should be innovative. ICB should specially emphasize to the operations and management of mutual fund to increase the performance of its mutual fund and way to find out the path for overcoming the problems of operations and management of ICB mutual fund.


-The End-

Bibliography

ICB, Annual Report, 2009-2010, 2008-2009, 2007-08.

ICB AMCL, Annual Report, 2009-2010, 2008-2009, 2007-08, 2006-07.

Various Journals Kept in the ICB Library.

Business Communication - Lasiker & Pettit.

www.icb.gov.bd

www.dsebd.org

www.bangladesh-bank.org

The Daily Financial Express

DSE Library


Appendix

List of Table:

List of figures

Sl No. Figure Title Page No.

01 Shareholding Position of ICB.02 Capital Structure of ICB as on 30th June,2010.03 SWOT Analysis.04 the working of a Mutual Fund.

05 Comparing a portfolio’s T value.


Sl No. Table Title Page No.

01 Shareholding Position of ICB

02 Capital structure of ICB:

03 Launching of ICB Mutual Fund

04 Dividend per Certificate (Taka)

05 NAV per certificate

06 Consolidated position of portfolios of ICB Mutual

Funds

07 Performance Compared on the basis of Treynor ratio

08 Performance Compared on the basis of Sharpe ratio

09 Net selectivity results

10 performances regarding various measures


Documents

performance evaluation of ICB mutual funds