DETERMINANTS OF EQUITY MUTUAL FUNDS PERFORMANCE IN GHANA

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ABSTRACT

The main objective of this study is to identify factors that significantly influences the performance of equity mutual funds in Ghana. The Ghana Stock Exchange (GSE) like most other West African Exchanges is not robust. The market is not price sensitive to market information and hence the question how and what factors influence the performance recorded by the market. This uncertainty about the main drivers of performance of equity mutual funds in Ghana motivated the research on the topic “Determinants of Equity Mutual Funds Performance in Ghana”

The variables employed in the study included the Gross Domestic Product (GDP) of Ghana, Sex of the fund manager, Age of the fund, the Ghana Stock Exchange All Share Index and the Size of the fund measured as the total net asset under management (TAUM).

Consequently, Panel data regression method was employed for the formulation of the models to be used in the study and STATA 12 is also employed for the analysis of the data gathered for the period 2010-2017 which is the study period.

The fundamental findings of the study were that the Total Net Asset under Management (TAUM) and the GSE-All Share Index were relevant and significant factors to explain the performance of equity mutual funds in Ghana. However, the Sex of the fund manager, the Gross Domestic Product (GDP) and the age of the fund in operation were not relevant enough to be considered as factors in determining the performance of equity mutual funds in Ghana.

It is recommended that the government should ensure that the macroeconomic variables of the economy are well managed since they have an influence on the performance of mutual funds in Ghana. It is also recommended that Equity mutual fund managers should strive to increase the size of their funds as this is seen to influence performance positively over time.

In conclusion, it is established that the Total Net Asset under Management (TAUM) and the GSE- All Share Index are more significant factors to explain the performance of equity mutual funds in Ghana. The Sex of the fund manager, the Gross Domestic Product (GDP) and the Age of the fund in operation least important in considering factors in determine the performance of equity mutual funds in Ghana.

CHAPTER ONE

INTRODUCTION

         Background to the Study

Equity represents part ownership of an entity. Firms issue shares in an attempt to gather or obtain funds in order to meet the recurrent or capital needs of the firm. The issuance of shares by a firm could take the form of a common stock or a preferred stock. Common stock holders are usually referred to as the real or true owners of the firm or institution, otherwise called the ordinary shareholders. This stems from the fact that, these shareholders are usually the last to be paid in the event of liquidation. The issuance of a common stock entitles the shareholder to certain rights, such as the right to proxy voting, thus entitling the shareholder to delegate his voting right to another, usually through a written authorization to enable the elected person exercise the right on behalf of the shareholder in matters concerning decision making especially in his absence. They also have the right to vote in the election of the board which constitutes the basis upon which the checks and balances of the firm are constituted and further help in the formulation and development of organizational policies. Also the common shareholder has the first opportunity at buying any newly issued shares before it is opened to the public. This is to make room at enabling the shareholder either retain or acquire more shares before dilution through the issuance of new shares. This is referred to as the preemptive rights of the ordinary shareholder. This is usually issued to the ordinary shareholder before a seasoned offering is made by the firm to the general public. The preferred shareholder on the other hand is entitled to be paid first in the event of any liquidation unlike the common shareholder. The preferred stock holder is not entitled to voting rights in the making of organizational rules and the taking of decisions unlike the ordinary shareholder. The preferred shareholder is merely an investor in the firm or organization and is not concerned by the running of the firm. The preference shareholder’s dividend payment takes

priority over that of the common shareholder’s dividend payment, thus the preferred shareholder in the event of deferment of the payment of dividend, will be entitled to the payment of all accrued dividend when payment resumes before any dividend may be paid to the ordinary shareholder. This is in the fact that; the preferred shareholder has a claim on the firm’s assets but are however subordinates to bondholders in relation to the issue guarantees which are usually given to bondholders other than the preferred shareholder.

The mutual fund industry globally is rapidly growing and this is seen in the year on year increase in the total asset under management (TAUM) of the various mutual fund institutions. This is quickly attracting many more investors into the industry due to the notable attributes of the industry. The total net asset of the world’s mutual fund industry stands at US$ 49.3 trillion as at the year 2017 (Investment company factbook, 2018) as against the global industry total net asset of US$ 40.4 trillion in the year 2016 (Investment company factbook,2017). This is a clear indication of the consistent growth in the global pool of the industry and the growing investor confidence in the markets. This growth in investor confidence could be attributed to the strong regulator checks and balances. It is very usual to have the regulator of these markets in the respective countries stipulate the publication of annual reports to the fund’s shareholders and in some cases regulator requirement to submit a monthly and quarterly report. These measures are all aimed at protecting the investor and providing the investor with adequate information aimed at improving the decision making process. The United States (U S) was a major player contributing to this global pool. The U S contributed about US$ 22.1 trillion to the global pool, thus representing about 44.8%. This then makes the U S mutual fund industry undoubtedly one of the highly patronized financial instruments in the U S economy and a mark for global recognition among market participants.

A mutual fund is a collective investment scheme which involves the pooling of funds from various investors. In a mutual fund investment, the parties that buy shares in the fund are deemed as shareholders of the fund and are entitled to as much information as required by the law in the specified country for which the mutual fund shareholders belong or the fund operates. In Ghana, the Securities and Exchange Commission (SEC), Securities Act 2015 requires mutual funds to publish their annual report. This is aimed at enabling the investor make a well informed decision. According to the U. S Securities and Exchange Commission, a mutual fund is expected to invest majority of the funds of the pool to the area where the name implies, (U. S SEC, pub 182). The risk profile of every investor varies and this has the tendency at influencing the type of interest bearing assets the investor decides to buy into. The equity mutual funds are considered to be very risky and this is due to its dependency on the performance of the selected stocks by the fund manager. As in every robust economy where the stock prices reflect all market available information, the rapid response of stock prices to market conditions has the tendency to render the prices of stock to be very volatile and prediction is unreliable. Hence, equity mutual funds shares are usually issued as long term investments with the prospect of capital gains and dividend distribution to maximize shareholder value. In Ghana, the Databank Epack, SAS Fortune fund, Firstbanc Heritage fund are examples. A mutual fund investment may be structured to be an index fund where the funds of the firm are used in the purchase of selected market indices and this is particularly the case where it is difficult to outperform the market. Such market indices may include the S& P 500, NASDAQ and the GSE all-share index. The managers of such index based mutual funds depend on the performance of the market. Thus, they are usually associated with low investment fees due to the little or no need for large staff numbers and account management. This is particularly of interest to investors with the interest at maximizing return and cutting down on cost associated with mutual funds. Another form of mutual fund is the money market mutual funds

which are considered risk neutral due to the relative stability and minimal default risk associated with money market instruments. They invest in bonds, certificate of deposits, fixed income securities and the like. They are usually considered or recommended to investors who have the short to medium term investment objective in mind. In Ghana, the Databank money market fund, Firstbanc Firstfund and Gold Coast Money market fund are notable examples. Other types of mutual funds include fixed income mutual fund, balanced mutual funds, alternative funds, smart- beta funds, funds of funds and sector fund, (investopedia,2018).

There however exist ethical mutual funds for investors concerned with earning returns without any implication on their moral judgment. Ethical mutual funds involve the selection of funds in certain sectors of the economy that do not engage in socially undesirable activities such as the tobacco industry, alcoholic industry or the gambling industry. According to Bauer et al (2005) ethical mutual funds and that of the conventional mutual funds are not different in terms of the fund exposure to risk and its commensurate return over time. Hence it could be concluded that, the ethical mutual fund shareholder is not far from the market risk associated with the conventional mutual fund. According to Basso & Funari (2003), this restraint on management with regards to the selection of industries and companies to invest in has the tendency to affect the overall performance of these ethical mutual funds. In Ghana, the Databank Arkfund is an example of an ethical mutual fund which is primarily concerned with the investment of shareholders’ funds in socially desirable sectors of the economy.

A mutual fund may be structure as an open ended, close ended fund or an exchange traded fund. An open ended mutual fund has no limitation to the number of shares permitted to be issued. Such funds buy and sell shares at the prevailing Net Asset Value (NAV) of the fund. The Net Asset Value (NAV) presents the assets of the fund less the existing liabilities, divided by the shares

outstanding. It is the most popular type of investment style with respect to the mutual fund industry. Shares are continually sold and bought and hence an investor, who wishes to redeem or buy in to the fund, must buy or sell at the existing net asset value (NAV) which is usually made available on a daily basis by the firm’s analyst. On the contrary, the close ended mutual fund is an investment style which raises funds through an initial public offering and this is usually on a one- time basis. Thereafter, the fund is closed to new investors; however, a member may sell the existing shares to any new member willing to buy into the fund. This type of fund is highly liquid but provides a lower level of security as compared to the conventional open ended mutual fund. A close ended mutual fund is limited to the number of shares to be issued and operated like a listed entity on the exchange.

Performance of Mutual Funds in Ghana

The mutual fund landscape of Ghana is gradually gaining grounds in the light of the establishment of many mutual funds. There are currently over thirty-seven (37) registered mutual funds in Ghana with majority of these funds being money market. This could be partially due to the clarity that exists in money market instrument as against the equity based instrument. Ghanaians on the aggregate gradually understand how the mutual fund industry functions, the products they offer and how they help in liquidity and security of funds. Over the years the Databank Mfund Limited as the first money market mutual fund has recorded significant performance as a pioneer in the money market mutual fund. The First banc first fund in the year 2016 recorded a significant gain to become the best money market mutual fund in Ghana with a year ending yield to date return of 36.7% as against the Databank year ending yield to date of 24.97%. The other market players in the money market mutual fund industry also returned a year ending yield to date comparatively well with returns above the prevailing Government of Ghana Treasury Bill which recorded a least

return of 10.69% and a maximum return of 23.97% between the period 2010 to 2017 The equity mutual funds like the SAS fortune fund also recorded a historic year to end yield of 89.2% in the year 2013 making it one of the best equity mutual fund in that year with respect to its yield. Nevertheless, the Epack of Databank also recorded 83.93% in the same year 2013 closely matching the SAS Fortune fund. In recent times, the capital market at large has not performed well partially due to poor corporate governance measures which has seen a number of listed firms delist and further, some firms losing their license in the industry they operate. Nevertheless, as the equity mutual funds purchase securities across a spectrum of these entities, the effect of the turbulence on a number of these firms had little impact on the performance of the fund at large.

         Problem Statement

After the 2008 global financial crisis, most economies of the world have engaged various stakeholders of the financial market on ways of mitigating that mishap, to foresee and possibly to prevent the future occurrence of the crisis. Thereafter, some economies of the world have not been able to fully recover from the crisis. Many economies saw the injection of capital funds from the state in order to sustain the local institutions which are the backbone of the financial sector. Thus when they break, the financial system also breaks. A key attribute to the cause of the crisis was poor regulation of the various financial markets, (Ramadhan & Naseeb, 2015). This brings to light the relevance of supervision in the financial system. Notwithstanding, the Ghanaian financial market has also experienced some volatility over the period 2016-2018. This period saw the collapse of some banks due to poor cooperate practices and supervision by regulators. The equity market in Ghana provides an avenue for members of society to be part owners of entities. The Ghana Stock Exchange is the market place for the trading of secondary shares. The Ghana Stock Exchange (GSE) like most other West African Exchanges is not robust. The market is not price

sensitive to market information and hence the question how and what factors influence the performance recorded by the market. Thus one may wonder if a listed firm’s performance in operational activities is the only factor responsible for the recorded losses or gains. Equity mutual funds purchase shares from a majority of these entities and the primary indicator for an average investor is the question of return. However, it is very well known that the equity mutual fund is characterized by both capital gains and dividend payments which sum up to form the return on the capital invested. Nevertheless, does return alone suffice for the rational investor or are investors only looking at return in Ghana with respect to the equity mutual fund? If the sole aim of the investor is based on return alone, then alternative scheme like the fixed deposit and bonds could have been ideal for an investor of return interest only. However, there are other factors worthwhile to be looked at by the investor by taking into consideration the risk exposure of the fund, thus, did the fund make that return by taking excessive risk with fund selection and timing or it was achieved by proper market research and knowledge into stock selection. These factors thus raise the question of what really are the factors that determine the performance of equity based mutual funds. The composite index is the benchmark of most equity mutual funds in Ghana. Thus it is worthwhile to consider the fact that, equity mutual funds thrive to outperform the market index in order to sell to the market their performance above the average. The Ghana Stock Exchange (GSE) continues to make marginal gains and substantive losses over the period. The composite index of the exchange recorded a negative return of 11.80% in 2015 and a 15.33% in the year 2016, (SEC annual report, 2016). However, the market in the year 2008 saw a record improvement of a gain of about 58% on the Exchange. This brings to light the frailty of the Ghanaian equity market. It is believed, the equity market is the central or the focal point to capital growth and generation for existing and new businesses. In Ghana, the Ghana Alternative Market is an alternative to the Ghana stock exchange. The Alternative market exists to provide small and medium scale enterprises (SME’s) with the

opportunity to raise capital other than on the Ghana Stock Exchange. This is because of the high enlisting requirements of the Ghana stock exchange. These improvements strategies were geared at creating an enabling environment and making room for start-ups and enterprises of various shapes and forms to gain interest in the raising of capital through the issuance of shares. This also helps in the overall growth of the capital market. Most mutual fund firms in the country operate equity market funds in accommodation with the other fund types such as the money market funds and ethical funds. The performance of these equity market mutual funds is dependent on certain parameters. With the volatility in the Ghanaian financial system and the seemingly poor performance of the equity market over time, it is prudent for investors who purchase equity based mutual funds to ascertain what factors have the tendency to affect their returns and hence their long term investment share price in an environment where the equity market is held by a few major corporations and the market contribution to the entire Gross Domestic Product (GDP) is minimal.