Portfolio Performance Analysis of the Mutual Funds of Investment Corporation Of Bangladesh

31th October,2011

Internship Report on Portfolio Performance Analysis of the Mutual Funds of Investment Corporation of Bangladesh

Submitted to Jahangir Alam Chowdhury, Ph.D. Professor, Department of Finance, University of Dhaka

Submitted By Abu Bakar Seddeke 13th Batch, ID-098 Department of Finance University of Dhaka

Date of Submission: 31th October, 2011

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Supervisor Sirs Certificate

This is to certify that the internship report on Portfolio Performance Analysis of the Mutual Funds of Investment Corporation of Bangladesh is done by Abu Bakar Seddeke, ID No: 13-098 as a partial fulfillment of the requirement of BBA Degree from the Department of finance, University of Dhaka.

The report has been prepared under my guidance and is a record of the internship report work carried out successfully.

Supervisor Jahangir Alam Chowdhury, Ph.D. Professor, Department of Finance Faculty of Business Studies University of Dhaka.

Declaration

I do hereby solemnly declare that the work presented in this internship report has been carried out by me and has not been previously submitted to any other University, College or Organization before.

I further undertake if indemnify the university against any loss or damage arising from breach of the forgoing obligation.

Abu Bakar Seddeke Roll: 13-098(B) BBA, 13th Batch Department of Finance University of Dhaka.

Letter of Transmittal

October 31th October, 2011 Jahangir Alam Chowdhury, Ph.D. Professor, Department of Finance, University of Dhaka Subject: Submission of internship report on Portfolio Performance Analysis of the Mutual Funds of Investment Corporation of Bangladesh. Dear Sir: In connection to my practical orientation at Investment Corporation of Bangladesh, I submit here with my internship report title Portfolio Performance Analysis of the Mutual Funds of Investment Corporation of Bangladesh. I have tried my level best to successfully complete my internship program through the organizational attachment as well as a complete report. As an intern it is usual that report may lack professionalism in some cases. For any unintentional inadequacy in the report, your sympathetic consideration would be highly appreciated. I sincerely expect that you would be kind enough to accept my report for evaluation and obliged thereby. Sincerely Yours, Abu Bakar Seddeke 13th Batch, ID-098 Department of Finance University of Dhaka

Acknowledgement

In the process of preparing this report I received persistent cooperation from number of individuals whose names are not possible to mention in this report but I would remember them with my heart felt appreciation and gratitude. First of all, I am very much grateful to Almighty Allah who gave blessings, courage and ability to prepare this report. I am very much grateful to Jahangir Alam Chowdhury, Professor, Department of Finance, University of Dhaka, for guiding me to complete my internship program. I am also highly indebted to him for his scholarly and constructive suggestion which was of much assistance to prepare this report on Portfolio Performance Analysis of the Mutual Funds of Investment Corporation of Bangladesh. During the course of internship program I have got cooperation from number of officials and employees from Investment Corporation of Bangladesh. I render my gratitude to them for helping me carry out the Internship in a favorable environment. Finally, I would like show my profound gratitude to all of the respected teachers of the Department of Finance for mentoring me throughout the undergraduate program.

Table of Content
Serial no
1 2 3 4 5

Topic
Acronyms Executive Summary Chapter-1: Introduction Chapter-2: Literature Review Chapter-3: An overview of ICB Chapter-4: About Mutual funds Of ICB Chapter-5: Performance Analysis of ICB Mutual Funds Chapter-6: Findings and Conclusion Reference Appendices

Page no
7 8-9 10-14 15-17 18-24

25-36

37-56

8 9 10

57-59 60-61 62

ACRONYMS
ADB BDBL BSRS CAPM CDBL CIP CMDP CML CSE CV DGEN DP DSE EDF EEE GOB ICB ICBAMCL ICML IPO ISTCL NAV NAVPS NPM R&D ROE SEC : Asian Development Bank : Bangladesh Development Bank Limited : Bangladesh Shilpa Rin Sangstha : Capital Asset Pricing Model : Central Depository Bangladesh Limited : Cumulative Investment Plan : Capital Market Development Program : Capital Market Line : Chittagong Stock Exchange : Coefficient of Variation : Dhaka Stock Exchange General Index : Depository Participant : Dhaka Stock Exchange : Equity Development Fund : Equity and Entrepreneurship Fund : Government of Bangladesh : Investment Corporation of Bangladesh : ICB Asset Management Company Limited : ICB Capital Management Limited : Initial Public Offering : ICB Securities Trading Company Limited : Net Asset Value : Net Asset Value Per Share : Net Profit Margin : Research and Development : Return on Equity : Securities and Exchange Commission

Executive Summary
Investors want to invest their surplus money in dependable, reliable institution which offers secured, liquidity as well as attractive rate of return. Investor demands are differ from one to another. To meet the need of investors of all types, a wide range and adequate number of securities should be made available in the capital market. Institutions and institutional supports are absolutely necessary for such capital market activity. Investment Corporation of Bangladesh (ICB), as one of the largest investment banks, is the pioneer organization to perform the activities by creating demand for securities and on the other hand to ensure the supply of securities in Bangladesh capital markets. ICB Mutual Funds are also supporting ICB to fulfill its objectives to mobilize savings and to develop the capital markets. Initially, the activities of ICB were limited to underwriting public issue of shares, bridge financing, debenture financing and opening/maintaining investors' accounts (Investors' Scheme). ICB had largely expanded its areas and scope of activities and now provides various types of investment and banking services. Added activities include providing debenture loans to companies and loans to investors on margin trading basis, providing advances against ICB unit certificates, leasing of industrial equipment, managing unit fund and mutual funds, and participating in stock exchange for trading securities. As a component of the restructuring program of ICB under Capital Market Development Program (CMDP) initiated by the Government of Bangladesh (GOB) and the Asian Development Bank (ADB) and in terms of power conferred in the ICB Ordinance three subsidiary companies namely (i) ICB Capital Management Limited, (ii) ICB Asset Management Company Limited; and (iii) ICB Securities Trading Company Limited have been created and made operational to carry out merchant banking, mutual fund operations and stock brokerage functions respectively. Mutual funds are investment companies that own large, diversified portfolios of securities (mainly stocks, bonds and derivatives) selected by skilled securities analysts (with the exception of index mutual funds), purchased with money raised by selling shares of the mutual funds to investors and managed by highly qualified investment professionals. Mutual Funds substantially lower the investment risk of retail investors and reduce transaction costs. Because funds are professionally managed and strictly regulated, investors consider these sorts of investment tools as some of the most secured securities in stock markets. The mutual fund industry in Bangladesh is at its early or emerging stages, offering room for greater growth and product innovation. Mutual Funds contribution is bigger than other securities in developed countries. The contribution of the existing Mutual Funds in terms of the local stock market capitalization is around 3%, which is more than 50% in many developed countries such as US and Europe. The number of mutual funds in our country did not grow to that extent, mainly because of poor knowledge and the dearth of professionals. Educating investors is also a big challenge for any asset management company. Insufficient number of trustees and custodians are other major challenges for the smooth floatation of mutual funds. Despite the challenges, there are huge opportunities to develop this sector. A recent study indicates that Bangladesh's mutual fund sector has every possibility to
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grow at 40 percent a year in the next five years. RACE Management, a second generation asset management company who conducted the study, forecasts a Tk 10,000 crore growth for 2015, in terms of assets. The formation and operation of Mutual Fund in Bangladesh is constituted in the form of a Trust made by virtue of Deed of Trust in accordance with the provisions of Trust Act, 1882 and under the provisions of the Securities and Exchange Commission (Mutual Fund) Rules, 2001. This instrument of trust has to be registered under the provisions of the Registration Act, 1908. Mutual funds are the most regulated securities in our stock markets. In Bangladesh ICB has pioneered Mutual Funds for the sake of investors and of the capital market. Out of the total 27 (twenty seven) Mutual Funds, ICB and its Subsidiary have so far floated 20 (twenty) Mutual Funds in the Markets. Countrys first mutual fund, the First ICB Mutual Fund was launched on 25 April 1980. Since then ICB had floated 9 mutual funds up to 1996. All the ICB mutual funds are closed-end fund except ICB Unit Fund. ICB Unit Fund is an open-end mutual fund. Measuring of portfolio performance has become an essential topic in the financial markets for the portfolio managers, investors and almost all that have something to do in the field of finance and it plays a very important role in the financial market almost all around the world. At one time, investors or analysts evaluated portfolio performance almost entirely on the basis of the rate of return. They were aware of the concept of risk but did not know how to quantify or measure it, so they could not consider it explicitly. Treynor (1965) developed the first composite measure of portfolio that included risk Treynor Measure. Since then Jensen Alpha (1968), Sharpe Ratio (1966), Famas Return Decomposition (1972), numerous performance measures have been proposed. The portfolio performance of the ICB Mutual Funds were measured based on the composite portfolio performance measures and the composition analysis of the funds portfolios and rank the mutual funds accordingly. Treynor measures and Sharpe Ratios have provided different ranking of the mutual funds. The underlying logic behind the difference is diversification. The portfolios of ICB Mutual Funds are not completely diversified. As a result poorly diversified portfolios had high ranking on the basis of the Treynor measure. Famas Return Decomposition has indicated negative selectivity for most of the ICB Mutual Funds except Fifth and Fourth ICB Mutual Fund. It reveals the fact that in most of the cases, except those two funds, portfolio managers of ICB fail to diversify away the unsystematic risk properly through their portfolio selection strategy. Portfolios of all the ICB Mutual Funds are highly dominated and concentrated to a few number of stocks. Sectorial domination is also very high in the portfolios of ICB Mutual Funds. ICB as the fund manager mainly focuses on the stocks of high market capitalized and highly profitable companies. Earning multipliers, price-to-book value ratios and dividend history are also considered at the time of constructing or rebalancing the portfolios. The mutual funds of ICB have been trying to facilitate and stabilize the secondary markets of our country for several decades. These funds have been playing the key role to ensure the liquidity of security transaction in the burses. ICB usually stands its position against the hard effect and try to ensure the proper supply and demand of securities in the markets through its own portfolio and the mutual funds.

Chapter-1: Introduction
Chapter outline:
Chapter Outline 1. Introduction 1.1. Origin of the Report 1.2. Objectives of the Report 1.3. Scope of the Study 1.4. Methodology 1.5. Limitations

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1. Introduction Investing for the future has never been more important than it is today. The recent financial storm has left many people shaken, and many more wondering if investing their hard-earned money is even worthwhile anymore. This reaction is certainly understandable. Investment is considered as one of the most important and dominant factors of attaining the economic development of any country. Creation of investment opportunities by providing efficient institutional and diverse nature of securities will create positive investment environment to the surplus units to take the full advantage of their expectation. The depth of investment opportunities in Bangladesh is very narrow and inadequate. However, Investment Corporation of Bangladesh (ICB) as the state owned Investment Bank has positive role to play in this respect. Fund management is an important and complex factor to develop the capital market. There are large amount of local capital available in the hand of small and medium investors and comparatively low use of such fund is a major problem of our country. Investors want to invest their surplus money in dependable, reliable institution which offers secured, liquidity as well as attractive rate of return. Investor demands are differ from one to another. To meet the need of investors of all types, a wide range and adequate number of securities should be made available in the capital market. Institution and institutional supports are absolutely necessary for such capital market activity. ICB, as one of the largest investment banks, is the pioneer organization to perform the activities by creating demand for securities and on the other hand to ensure the supply of securities in Bangladesh capital market. ICB Mutual Funds are also supporting ICB to fulfill its objectives to mobilize savings and to develop the capital market. 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 form mutual funds inevitably depend on the performance and ability of the fund managers to construct and manage portfolios that generate above average risk-adjusted return. 1.1. Origin of the Report The Report entitled Portfolio Performance Analysis of the Mutual Funds of Investment Corporation of Bangladesh has been prepared as a fulfillment of BBA program authorized by the Department of Finance, University of Dhaka. Since the BBA program is an integrated, practical and theoretical method of learning, this program is required to have practical exposure in any kind of business organization. This report has been prepared on practical orientation. 1.2. 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.
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To obtain the knowledge about how the ICB Mutual Funds are managed. To evaluate and analyze the portfolio performance of ICB Mutual Funds.

1.3. Scope of the Study The main focus of the study is the analysis of portfolio performance of the mutual funds of ICB. The report intends to analyze the mutual funds of ICB based on mainly the composite portfolio performance measures. The study is concentrated in Investment Corporation of Bangladesh (ICB) and its activities. The portfolio performances are measured based on the eight closed-end mutual funds floated by ICB First ICB Mutual Fund, Second ICB Mutual Fund, Third ICB Mutual Fund, Fourth ICB Mutual Fund, Fifth ICB Mutual Fund, Sixth ICB Mutual Fund, Seventh ICB Mutual Fund and Eighth ICB Mutual Fund. The intention of the study was to identify the superior selection ability of ICB in constructing the portfolios of all the eight mutual funds as a fund manager. The study is also intended to give comprehensive insights of the ICB Mutual Funds that may help the market participants and analysts to make their decision or further analysis. 1.4. Methodology This study is conducted based on the application of theoretical knowledge of the field of finance 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. 1.4.1. 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. 1.4.2. Data Sampling For the analysis purpose time series data have been used. All the performance measures have been conducted based on the 120-monthly ending prices of all the ICB Mutual Funds of Dhaka Stock Exchange from July 2001 to Jane 2011. Dhaka Stock Exchanges General Index (DGEN) has been used as the benchmark index for the same period and the analysis. 364-days Treasury bill has taken as the risk-free rate for the same period.
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1.4.3. Data Analysis The obtained data have been analyzed from the perspective of qualitative judgments, quantitative analysis based on composite portfolio measures and the composition analysis of portfolios of ICB Mutual Funds. a) Qualitative Judgments In the qualitative analysis, mainly the theoretical aspects of ICB Mutual Funds have been provided. Current situation of the capital markets and the problems and prospects of mutual fund sector are also discussed. SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis of ICB Mutual Funds was the key focus of this section. b) Quantitative Analysis Primarily data have been analyzed based on the early work of portfolio performance measures. The focus was mainly on the Risk and Return analysis. These analyses was conducted based on some statistical tools namely; Arithmetic Mean and Geometric Mean for return analysis and Standard Deviations, Beta Coefficients, R-squared and Coefficient of Variations for risk analysis. Based on the return and risk analysis more advanced financial techniques have been used Composite Portfolio Performance Measures. The measures include Treynor Measure, Share Ratio, Jensen Measure (single factor) and M2 Measure. Later on an extension of the composite measure Famas Return Decomposition has been analyzed to identify the portfolio performance of ICB Mutual Funds. c) Portfolio Composition Analysis In the portfolio composition analysis, study has been conducted based on the most dominating stocks (minimum 50% of the portfolio) of the respective mutual funds portfolios. The financial performances of the companies of the dominating stocks were analyzed based on some key financial indicators like current ratios, debt-to-equity ratios, net profit margins, return on equities, price earnings ratios, earning per share ratios, dividend declarations, market category and market capitalizations. Data was collected from the respective companies latest published annual reports and the website of Dhaka Stock Exchange. Later on tests of hypothesis have been conducted to examine statistical significances of differences of variables between each mutual fund and the all ICB Mutual Funds. 1.5. 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.

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- 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.

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Chapter-2: Literature Review

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2. Literature Review Measuring of portfolio performance has become an essential topic in the financial markets for the portfolio managers, investors and almost all that have something to do in the field of finance and it plays a very important role in the financial market almost all around the world. Earlier then 1950, portfolio managers and investors measured the portfolio performance almost on therate of return basis. During that time, they knew that risk was a very important variable in determining investment success but they had no simple or clear way of measure it. In 1952 Markowitz created the idea of Modern Portfolio Theory and proposed that investors expected to be compensated for additional risk and provided a framework for measuring risk. In early 1960, after he development of portfolio theory and capital asset pricing model in subsequence years, risk was included in the evaluation process. The capital asset pricing model of William Sharpe (1964).The attraction of capital asset pricing model was that it offered power predictions about how to measure risk and the relation between expected return and risk. The literature on mutual fund performance measurement goes back to the beginning of asset pricing theory, if not further. Since the early formal measures of Jensen (1968), Sharpe (1966), and Treynor (1965), numerous new performance measures have been proposed. Treynor(1965) was the first researcher developing a composite measure of portfolio performance. He measured portfolio risk with beta and calculated portfolio market risk premium and later on in 1966 Sharpe developed a composite index, Sharpe Ratio, which is similar to the Treynor measure, the only difference being the use of standard deviation instead of beta. For a completely diversified portfolio, one without any unsystematic risk, the two measures gives identical rankings because the total variance of the completely diversified portfolio is its systematic variance. Alternatively, a poorly diversified portfolio could have a high ranking on the basis of the Treynor performance measure but a much lower ranking on the basis of the Share performance measure. Any difference in rank would come directly from a difference in diversification. Jensen's alpha was first used as a measure in the evaluation of mutual fund managers by Michael Jensen in the 1970s. The CAPM return is supposed to be 'risk adjusted', which means it takes account of the relative riskiness of the asset. After all, riskier assets will have higher expected returns than less risky assets. If an asset's return is even higher than the risk adjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors are constantly seeking investments that have higher alpha. According to Prof. Dr. Klaus Spremann, Portfolio measurement has not only the goal to inform about the quality of a portfolio performance__ but and thats even more important__ to decompose and analyze the success factors of a portfolio. Eugene Fama (1972) developed a decomposition of portfolio performance that extends beta-based differential return analysis to extract the components of return that are based on risk management and those based on selectivity. The basic premises for Famas technique is that overall performance of a portfolio, which is its return in excess of the risk-free rate, can be decomposed into measures of risk-taking and security selection skill. The selectivity component represents the portion of the portfolios actual return beyond that available to an unmanaged portfolio with identical systematic risk. Thus this
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selectivity measure is used to assess the managers investment competency. Portfolio performance evaluation focuses on the aggregate return and risks generated by an active portfolio. The evaluation involves comparing the active portfolio to peer group of active portfolios or to variously specified nave portfolios. It is also desirable to identify the added value of various strategies within the portfolio. Exploring performance within a portfolio is the realm of attribution analysis. This analysis requires much more information, including the composition of the portfolio across time.

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Chapter-3: An overview of ICB

Chapters outline:
3.1 Introduction 3.2 Objectives of ICB 3.3. Business Policy 3.4. Business Functions 3.5. Continued Operations of ICB 3.6. Subsidiary Companies of ICB 3.7 Chapters Conclusion

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3.1. Introduction Investment Corporation of Bangladesh (ICB) is an investment bank established to accelerate the pace of industrialization and develop a sound securities market in Bangladesh. It was established in 1976 with the objective of encouraging and broadening the base of industrial investment. ICB underwrites issues of securities, provides substantial bridge financing programs, and maintains investment accounts, floats and manages closed-end and open-end mutual funds and closed-end unit funds to ensure supply of securities as well as generating demand for securities. ICB also operates in both Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) as dealer. The Investment Corporation of Bangladesh (ICB) was established on 1 October 1976 under "The Investment Corporation of Bangladesh Ordinance, 1976" (No. XL of 1976). The establishment of ICB was a major step in a series of measures undertaken by the Government to accelerate the pace of industrialization and to develop a well-organized and vibrant capital market in Bangladesh. It caters to the need of institutional support to meet the equity gap of the companies. In view of the national policy of increasing the rate of savings and investment to promote selfreliant economy, ICB assumes an indispensable and pivotal role. Initially, the activities of ICB were limited to underwriting public issue of shares, bridge financing, debenture financing and opening/maintaining investors' accounts (Investors' Scheme). ICB had largely expanded its areas and scope of activities and now provides various types of investment and banking services. Added activities include providing debenture loans to companies and loans to investors on margin trading basis, providing advances against ICB unit certificates, leasing of industrial equipment, managing unit fund and mutual funds, and participating in stock exchange for trading securities. 3.2. Objectives of ICB To encourage and broaden the base of investment To develop the capital market To provide for matters ancillary thereto To mobilize savings To promote and establish subsidiaries for business development 3.3. Business Policy To act on commercial consideration with due regard to the interest of industry, commerce, depositors, investors and to the public in general To provide financial assistance to projects subject to their economic and commercial viability To arrange consortium of financial institutions including merchant banks to provide equity support to projects and thereby spread the risk of underwriting. To develop and encourage entrepreneurs To diversify investments To induce small and medium savers for investment in securities To create employment opportunities 3.4. Basic Functions Underwriting of initial public offering of shares and debentures Underwriting of right issue of shares Direct purchase of shares and debentures including placement and equity participation
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Providing lease finance to industrial machinery and other equipment singly or by forming syndicate Managing investors' Accounts Managing Open End and Closed End Mutual Funds Operating on the Stock Exchanges Providing investment counsel to issuers and investors Participating in Government divestment Program Participating in and financing of jointventure projects Dealing in other matters related to capital market operations Conducting Computer training programs Providing advance against ICB Unit and Mutual Fund certificates To act as trustee and custodian Providing Bank guarantee Providing consumer credit Introducing new business products suiting market demand To supervise and control the activities of the subsidiary companies

3.5. Continued Operations of ICB

3.5.1 Portfolio Management Portfolio management is one of the prime functions of ICB. Being a leading institutional investor, ICB contributes significantly to the development of the country's capital market through active portfolio management. As on 30 June 2009, the market value of the securities of ICB's investment portfolio stood at Tk. 13,696.90 million. 3.5.2. Project Loan Appraisal Appraisal, sanction, disbursement and recovery of project loans approved by the top management are one of major operating activities of ICB. Financing the development of industrialization is one of the key objectives behind the formation of ICB. Up to 30 June 2009 ICB has financed 308 projects involving Tk. 1145.20 million. 3.5.3. Private Placements ICB is authorized to act as an agent of the issuers and investors for private placements of securities. Under this arrangement, ICB places securities to individuals/institutions on behalf of the issuer for which it charges fees. ICB also acquires shares/securities for its own portfolio both in pre-IPO placement and equity investment.

3.5.4. Trustee, Custodian and Banker to the Issues To act as the custodian to the public issue of open-end and closed-end Mutual Funds ICB provides professional services. It also acts as the Banker to the issues and provides similar services through the network of its branches. Fees in this regard are negotiable. ICB is acting as trustee to the debenture issues and asset-backed securitized bonds. Up to 30 June, 2009 ICB
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acted as trustee to the debenture issues of 17 companies, issues of 9 bonds of 6 companies and manager to the public issues of 41 companies. It also undertook the responsibilities of trustee as well as custodian to 9 closed-end and 2 open-end mutual funds. 3.5.5. Securities Trading ICB Securities Trading Company Ltd. actively participates in the trading activities of securities on both the bourses as member. Over the years, ICB has been one of the largest traders on the exchange. ICBs investors scheme and the Mutual Fund/Unit Fund not only mobilize individuals savings but are also the source of demand for and supply of securities in the stock market. 3.5.6. Investors Scheme The Investors' Scheme was introduced in 1977 with the objective of broadening the base of equity investment through mobilizing savings of small and medium size savers for investment in the securities market. In addition to Head Office, Investment Accounts are also operated at the 7 branch offices of ICB located at Dhaka, Chittagong, Rajshahi, Khulna, Barisal, Sylhet, and Bogra. However in view of strategic changes in policy reform, from 01 July 2002 ICB Capital Management Ltd.' started opening and managing investment accounts. ICB will continue to provide services to its existing accounts only. 3.5.7. Venture Capital Financing As part of business diversification and to encourage rapid industrialization of non-traditional, risky but potential industries in the country ICB has launched Venture Capital Financing Scheme in the year 2008-2009. 3.5.8. Lease Financing ICB Provides lease finance mainly for procurement of industrial machinery, equipment and transport. ICB provides professional advice and financial assistance to the intending clients. The period of lease, rental, charges, and other terms and conditions are determined on the basis of type of assets and the extent of assistance required by the applicants. Lease financing scheme of ICB started in 1999. 3.5.9. Advance against Unit/Mutual Fund Certificates Scheme Advance against ICB Unit Certificates Scheme was introduced in 1998, especially designed for the ICB unit- holders to meet their emergency fund requirements. One can borrow maximum Tk. 85 per unit by depositing his/her unit certificates under lien arrangement from any of the ICB offices where from such unit certificates were issued. 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 the time of borrowing by depositing his/her certificates under lien arrangement from any of the ICB offices.

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3.5.10. Consumer Credit Scheme As part of business diversification program, ICB has introduced "Consumers Credit Scheme" in 2003-04 considering at the need of various household commodities of different employees of Govt., semi-govt., autonomous bodies and some established private sector organizations. Under this scheme one can enjoy minimum Tk. 1.0 lac but maximum Tk. 5.0 lac credit facilities. The rate of interest on the loan is reasonable and competitive which is fixed by the board of directors of ICB considering the bank rate and with the guidelines of Bangladesh Bank. 3.5.11. Bank Guarantee scheme ICB introduced Bank Guarantee scheme in 2002-03. ICB provides (i) Bid Bond for enabling the business people to participate in any tender or bidding; (ii) Performance Bond for helping the business community to continue their business smoothly by fulfilling their obligations promised by them to their clients; and (iii) Customs Guarantee for solving different disagreements between the customs authority and the business classes at the initial stage. The maximum limit of guarantee is Tk. 20.00 million and would be issued against at least 20% cash and 80% easily cashable securities or against 100% cash margin. Re-guarantee from other financial institution is required for guarantee against the amount exceeding Tk. 20.00 million. 3.5.12. Mergers and Acquisitions Companies willing to expand their business through mergers or acquisitions or to Divest projects that no longer viable into present capacity of operation can contact the Corporation. ICB provides professional services and advices in respect of shaping up the cost and financial structures to ensure best possible operational results. Besides, in case of divestment, the corporation, through network and established business relationship, bring buyers and sellers together, help them to negotiate final agreement and advice on the emerging corporate structure. 3.5.13. Equity and Entrepreneurship Fund (EEF) The Government of Bangladesh had set up an Equity Development Fund (EDF) in the budget 2000-2001 known as Equity and Entrepreneurship Fund (EEF) with a view to encouraging the investors to invest in the rather risky but promising two sectors, namely, software industry and food-processing/agro-based industry. Initially the management of the fund was vested to Bangladesh Bank. Subsequently a sub agency was signed between ICB and Bangladesh Bank on 1 June 2009. According to this agreement, the management of the fund has been entrusted on ICB. 3.6. Subsidiary Companies of ICB As a component of the restructuring program of ICB under Capital Market Development Program (CMDP) initiated by the Government of Bangladesh (GOB) and the Asian Development Bank (ADB) and in terms of power conferred in the ICB Ordinance three subsidiary companies namely (i) ICB Capital Management Limited, (ii) ICB Asset Management Company Limited; and (iii) ICB Securities Trading Company Limited have been created and made operational to carry out merchant banking, mutual fund operations and stock brokerage functions respectively. Three subsidiary companies are being operated by their own memorandum and articles of associations, Companies Act, 1994, SECs Rules and Regulations and other applicable laws. The companies have independent Board of Directors and separate management. As per provision of
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ICB Ordinance (amended), ICB ceased to undertake new business in the respective areas from the dates the subsidiary companies became operative. It shows in exhibit-3.1:

Source: Annual report of ICB Asset Management Company 2009-2010 3.6.1. ICB Asset Management Company Limited (IAMCL) IAMCL was incorporated as a public limited company with an authorized capital of Tk. 1000 million and a nominal paid up capital of Tk. 20.00 million, which was subsequently increased to Tk. 75.00 million, under the Companies Act, 1994 with the Registrar of Joint Stock Companies and Firms on 5 December 2000. The Company obtained license on 14 October 2001 from the Securities and Exchange Commission (SEC) under Securities and Exchange Commission (Mutual Fund) Rules, 2001 to carry out the mutual fund activities. The company is engaged in investment management; more specifically floating and managing both open-end and closed end mutual funds, provident funds etc. The company is dedicated towards development of mutual fund industry as well as the capital market of Bangladesh. ICB Asset Management Company Ltd. has so far floated 8 (six) closed-end mutual funds and 2 (two) open-end mutual Funds through which the small and medium savers get opportunities to invest their savings in a balanced and relatively low risk portfolio. 3.6.2. ICB Capital Management Limited (ICML) ICML is a fully owned subsidiary of Investment Corporation of Bangladesh. The company obtained license from the Securities and Exchange Commission to act as Issue Manager, Underwriter, and Portfolio Manager and to carry out other merchant banking operations under the Securities and Exchange Commission (Merchant Banker and Portfolio Manager) Regulations, 1996. The company was incorporated under the Companies Act, 1994 on 5 December 2000 and obtained registration from the Securities & Exchange Commission on 16 October 2001. The company started its' operation from 01 July, 2002 upon issuance of gazette notification by the government. The Company has a separate Board of Directors comprising 3 members from the private sector having good academic qualification, expertise and experience in the field of business, finance and investment.

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Key activities of ICML are given below:

Exhibit-3.2, Sources: Annual report ICB Capital Management Limited (ICML), 2009-2010,

3.6.3. ICB Securities Trading Company Limited (ISTCL) ISTCL performs stock brokerage activities. The Company maintains its activities to become the most active broker of both Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE). The Company has started trading of securities for general investors alongside the institutional investors from the beginning of 2003-2004. ISTCL has obtained license from SEC to act as the full service Depository Participant (DP) in Central Depository Bangladesh Ltd. (CDBL).

3.7. Conclusion In this chapter, I have discussed about ICBs basic functions, its subsidiary companies, policies. objectives. In the next chapter, some discussions about mutual funds are shown.

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Chapter-4: About Mutual funds Of ICB

Chapters outline: Chapter Outline 4.1. Introduction 4.2. Types of Investment Companies 4.3. Investment Objectives of Mutual Funds 4.4. Advantages of Mutual Funds 4.5. Mutual Funds in Bangladesh 4.6. ICB Mutual Funds 4.7 Chapters conclusion

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4.1. Introduction Mutual funds are investment companies that own large, diversified portfolios of securities (mainly stocks, bonds and derivatives) selected by skilled securities analysts (with the exception of index mutual funds), purchased with money raised by selling shares of the mutual funds to investors and managed by highly qualified investment professionals. 4.2. Classification of Investment Companies There are three types of investment companies: open-end funds, closed-end funds and unit trusts. 4.2.1 Open-End Funds An open-end fund is a collective investment scheme which can issue and redeem shares at any time. An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders. This type of mutual fund does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell. Globally, the majority of mutual funds are open-end. By continuously selling and buying back fund shares, these funds provide investors with a very useful and convenient investing vehicle. The main characteristics of open-end fund: Liquidity: Anytime the issuer is ready to purchase the securities from holders. Price: the net asset value (NAV) of a mutual fund indicated the value per share. Price normally depends on bid and asked price. Price determined by following formulaNAV= (Market Value-Liabilities)/ No. of share outstanding Charges: Load Fund: The sales commission is referred to as a load. A mutual fund imposing sales commission is called load fund. No-load fund: A mutual fund that does not impose a sales commission is called a no-load fund. Back-end load fund: A fund does not charge a commission for share purchase, it may still charge investors a fee to sell (redeem) shares. Such fund referred to as back-end load funds. 12 b-1 fee: Fee charged by some mutual funds to cover promotion, distributions, marketing expenses, and sometimes commissions to brokers. 4.2.2 Closed-End Funds A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange. It raises a prescribed amount of capital only once through an IPO by issuing a fixed amount of shares, which are purchased by investors in the closed-end fund as stock. Unlike regular stocks, closed-end fund stock represents an interest in a specialized portfolio of
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securities that is actively managed by an investment advisor and which typically concentrates on a specific industry, geographic market, or sector. The NAV of closed-end funds is calculated in the same way as for open-end funds. However, the stock prices of a closed-end fund fluctuate according to market forces (supply and demand) as well as the changing values of the securities in the fund's holdings. 4.2.3 Unit Trusts Unit trust is a registered investment company which purchases a fixed, unmanaged portfolio of income producing securities and then sells shares in the trust to investors. Unit trusts typically invest in bonds. They differ in several ways from both open-end and closed-end mutual funds that specialize in bonds. First, there is no active trading of the bonds in the portfolio of the unit trust. Second, unlike open-end and closed-end mutual fund investor, the unit trust investor knows that the portfolio consists of a specific portfolio of bonds and has no concern that the trustee will alter the portfolio. 4.3. Investment Objectives of Mutual Funds Generally, portfolio managers divide up their investment objectives into nine different approaches, which are categorized by three company sizes (large cap, mid cap and small cap) and three investing styles (value, growth and blend). In the case of the former, size is determined by a company's market capitalization, commonly referred to as market cap. Assets or the number of employees are not the logical measurements of company size for investment business. 4.4. Advantages of Mutual Fund Mutual Fund substantially lowers the investment risk of retail investors through diversification in which funds are spread out into various sectors, companies, securities as well as entirely different market. The investors save a great deal in transaction costs given that s/he has access to a large number of securities by purchasing a single share of a Mutual Fund. 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 the small investors access to the whole market that at 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. Mutual Fund is one of the most strictly regulated investment vehicles. The laws governing Mutual Fund require exhaustive disclosure to the SEC as well as the general public. The laws also entail continuous regulations of fund operations by the Trustee.

4.5. Mutual Funds in Bangladesh The mutual fund industry in Bangladesh is at its early or nascent stages, offering room for greater growth and product innovation. Elsewhere in the world, Mutual Funds have proved to be safe intermediately in capital and money market. Safety of funds, disposal of risks and a satisfactory yield are the hallmarks of Mutual Funds. In Bangladesh ICB is the harbinger of Mutual Funds. Out of the total 27 (twenty seven) Mutual Funds, ICB and its Subsidiary have so far floated 20 (twenty) Mutual Funds in the Market.
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Mutual Funds contribution is bigger than other securities in developed countries. The contribution of the existing Mutual Funds in terms of the local stock market capitalization is around 3%, which is more than 50% in many developed countries such as US and Europe. In neighboring India, the figure is 24 percent, such a market capitalization not more than 10 percent for Pakistan, a relatively weaker economy. The combined issued capital of the mutual funds listed in our burses is worth $ 45 million or Tk 3116 million and their market capitalization is only $ 230 million or Tk 15841 million. (The Fianancial Express, 2009) 4.5.1. Challenges for Mutual Fund Growth in Bangladesh Analysts pointed out that the market capitalization of Dhaka Stock Exchange increased by almost 10 times in the last 10 years riding on the growing demand by investors. But the number of mutual funds did not grow to that extent, mainly because of poor knowledge and the dearth of professionals. Educating investors is also a big challenge for any asset management company. Insufficient number of trustees and custodians are other major challenges for the smooth floatation of mutual funds. 4.5.2. Growth Potential of Mutual Fund Sector Despite the challenges, there are huge opportunities to develop this sector. A recent study indicates that Bangladesh's mutual fund sector has every possibility to grow at 40 percent a year in the next five years. RACE Management, a second generation asset management company who conducted the study, forecasts a Tk 10,000 crore growth for 2015, in terms of assets. The secondgeneration asset management firms that have been awarded licenses in two years 2008 and 2009 are Prime Finance, VIPB, LR Global and RACE. Earlier, there were only two such companies Investment Corporation of Bangladesh (ICB), a state-run organization, and AIMS Bangladesh, a privately owned one. The government-owned Bangladesh Shilpa Rin Sangstha (BSRS) now Bangladesh Development Bank Ltd. (BDBL), which has an asset management wing, is in dormancy.

Exhibit-4.1, source: ICB, viewed 26nd October 2011, Available fromhttp://www.icb.gov.bd/mutual_fund.php The RACE Management has a plan to launch Tk 725 crore mutual funds. AIMS, a firstgeneration company, will also come up with Tk 700 crore mutual funds. Two big close-end mutual funds worth Tk 8.0 billion will hit the country's stock markets this year to increase the depth of the market. The mutual funds will be floated through joint initiatives of a number of financial institutions for the first time in Bangladesh. The 'LR Global Bangladesh Mutual Fund One' worth Tk 3.0 billion is expected to make debut and another mutual fund valued at Tk 5.0 billion by this year-end in the bourses. (Rahman, 2009)
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4.5.3. Regulatory Framework for Mutual Fund in Bangladesh The formation and operation of Mutual Fund in Bangladesh is constituted in the form of a Trust made by virtue of Deed of Trust in accordance with the provisions of Trust Act, 1882 (Act II of 1882) and under the provisions of the Securities and Exchange Commission (Mutual Fund) Rules, 2001. This instrument of trust has to be registered under the provisions of the Registration Act, 1908 (Act No. XVI of 1908). The mutual fund may have various schemes of different size, tenure (not more than 10 years for closed-end mutual fund) and characteristics and may be closed or open-ended. The salient provisions for the formation and operation of Mutual Fund under the Securities and Exchange Commission (Mutual Fund) Rules, 2001 are discussed in brief in the following subsections. a) Main Features of a Mutual Fund - Tenure of a closed-end mutual fund must not more than 10 years. - Individuals as well as the institutional investors are eligible for investment in the Fund. - The Asset Management Company has to pay all registration and other fees as payable to the Commission or any other agencies. - The sponsor has to provide at least ten percent of the minimum size of a scheme to the mutual fund. - The Funds are not allowed to borrow to finance its investments, as long as it is not permissible under the rules. b) Rights, Duties and Obligation of the Parties of the Fund The Sponsors - The Sponsor is the main party to constitute the mutual fund by virtue of Trust Deed. - The Sponsor appoints the Trustee of the Mutual Fund, who holds the property of the Fund in trust for the benefit of the unit holders of the schemes in accordance with the rules. - The Sponsor appoints the Custodian, who shall provide custodian service to the Fund in accordance with the rules. - The Sponsor appoints the Asset Management Company, who shall manage the mutual fund for the benefit of the Fund and the unit holders of the Fund in accordance with the rules. - The Sponsor is prohibited from participating in any decision making process for any investments by the different schemes of the Mutual Fund. The Trustee - The Trustee is the guardian of the Fund holds all capital assets of the Fund in trust for the benefit of the unit holders, in accordance with the rules. The Trustee is bound to act in the best interest of the unit holders. - The Trustee is responsible to 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 SEC (Merchant Bank) Rules, 2001.

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- The Trustee preserves 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 has the powers to initiate the process of termination of the appointment of the Asset Management Company under specific events of violation of the Trust Deed, Investment Management Agreement and/or provisions of the Rules only, subject to prior approval of the Commission, in accordance with the provisions of the Rules. - The Trustee is prohibited from the participation in any decision making process for investments of the Fund and its various schemes. - The Trustee is empowered to appoint auditors for the various schemes of the mutual fund who must not be the auditors of the Trustee and/or the Asset Management Company and should regularly monitor the performance and activities of the auditors. - The Trustee will be paid an annual Trusteeship Fee of as percentage 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 Trustee cannot be removed without the prior approval of the Commission and must not retire until such time a new Trustee takes over under due process as laid down in the Rules. - The Trustee is obligated to maintain full and unconditional confidentiality of any information received from the Asset Management Company and as well as on the Fund. The Asset Management Company - The Asset Management Company is 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 Rules. - The Asset Management Company is responsible to take initiative to facilitate electronic settlement of certificates of the Fund with the CDBL. - The Asset Management Company is appointed take all reasonable steps and exercise all due diligence to ensure that the investment of the schemes of the Fund is not contrary to the provisions of the Trust Deed, the Investment Management Agreement and the Rules. - The Asset Management Company is prohibited to act as a Trustee of any mutual fund or to undertake any similar business activities without prior approval of the SEC, which may adversely affect the interest of the Fund.

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- The Asset Management Company is obligated to 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 SEC. - The Asset Management Company prepares and distributes prospectuses, annual and periodical reports of the Fund and shall maintain all sorts of communications with investor and other stakeholders as per the Rules and shall undertake advertising and other promotional activities. - The Asset Management Company needs to furnish all the relevant information and documents to the CDBL as may be required under the Depository Act, 1999 and Depository Rules, 2000. - The Asset Management Company may appoint any Distributor or Agent, including Banker to the Issue, and stock-broker or merchant banker at reasonable and competitive market based fees and commission for the promotion, distribution and/or subscription of the units of the schemes of the Fund. The Custodian -Duty of the Custodian is to keep liaison with the CDBL and collect and preserve information required for ascertaining the movement of securities of the Fund. - The Custodian in charge to keep the securities of the Fund in safe and separate custody and must provide highest security for the assets of the Fund. 4.6. ICB Mutual Funds In Bangladesh ICB has pioneered Mutual Funds for the sake of investors and of the capital market. ICB Mutual Funds are independent of one another. ICB Mutual Funds being listed are traded on the Dhaka and Chittagong Stock Exchange. Price of Mutual Fund certificates after IPO is determined on the Stock Exchanges through interaction of supply and demand. The market price of a Mutual Fund certificates is available in Stock exchange quotations and in newspapers. Countrys first mutual fund, the First ICB Mutual Fund was launched on 25 April 1980. Since then ICB had floated 8 mutual funds up to 1996. One of the three subsidiary companies, namely: ICB Asset management Ltd. formed under the capital market development program, started its business from 1 July 2002 to perform mutual fund management activities. Under reform program ICB discontinued new business of mutual fund operation. However, business in mutual funds which were undertaken before commencement of the subsidiary company is being managed by ICB. All the ICB mutual funds are closed-end fund except ICB Unit Fund. ICB Unit Fund is an open-end mutual fund.

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4.6.1. Launching of ICB Mutual Funds: The commencement time and their paid up capital at the time of beginning as follows:

Source: ICB, viewed 24nd October 2011, Available from: http://www.icb.gov.bd/sub_comp.php 4.6.2. Assets of ICB Mutual Funds ICB Mutual Funds Certificates holders shall have unfettered ownership in the 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 treated as the assets of the Corporation. 4.6.3. Management Fee and Charges At present management fee @ 1% on the paid up capital of the Fund is charged annually. No amount is charged on account of custodial and trust services. Parts of operating expenses are charged to the respective Mutual Funds on pro rata

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4.6.4. ICB Mutual Funds at a Glance: The financial activities of ICB mutual funds for 2001 to 2010 are shown in the exhibit: 4.2 and 4.3

Exhibit-4.2, Source: ICB, viewed 25nd October 2011, Available from

http://www.icb.gov.bd/pdf/quarterly_ar_3rd_mf_2010_11.pdf

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Exhibit-4.3, Source: ICB, viewed 25nd October 2011, Available from

http://www.icb.gov.bd/pdf/quarterly_ar_3rd_mf_2010_11.pdf

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4.6.5. Declaration of Dividends 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 the end of July each year. The Board of Directors of the Investment Corporation of Bangladesh in its meeting held on 30 July, 2011 approved Dividends on ICB Mutual Funds for the year 2010-2011 as follows exhibit 4.4: Sl No Name of Fund Dividend Per Certificate of (Tk.) 100.00 each 500.00 250.00 185.00 165.00 135.00 90.00 95.00 90.00 30.00

A. (01) First ICB Mutual Fund (02) Second ICB Mutual Fund (03) Third ICB Mutual Fund (04) Fourth ICB Mutual Fund (05) Fifth ICB Mutual Fund (06) Sixth ICB Mutual Fund (07) Seventh ICB Mutual Fund

(08) Eighth ICB Mutual Fund B. (01) ICB Unit Fund(TK. Per Certificate.)

Exhibit-4.4, Source: ICB, viewed 25nd October 2011, Available from

http://www.icb.gov.bd/zindex.php

4.6.6. 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 Certificate holder within the limits specified in the Income Tax Ordinance, 1984.10 (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 limits specified in the Act. (d) The Fund incomes are to be exempted from all taxes as granted by the Government. 4.6.7. ICB Unit Fund ICB Unit Fund was established on April 10, 1981. Its main objective is to mobilize savings through sale of its units to small investors and invest these funds in marketable securities. The scheme provides a potential source of equity and debt to industrial and commercial concerns and thus contributes to the industrial development of the country. Unit fund is an open ended Mutual Fund. It provides an opportunity to the unit holders to invest their funds in a well-managed and
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diversified portfolio with a high degree of security of capital and reasonable yearly returns. ICB units are securities within the meaning of Trust Act. 1882. After commencement of ICB Asset Management Company Ltd. from 1 July 2002 ICB has stopped sale of unit certificates under cumulative investment plan (CIP). The responsibility of managing the fund rests on ICB for which management fee @ Tk. 1.25 per Unit (net outstanding) is charged.11 The Corporation also discharges the responsibility of loading and unloading of securities in and from the portfolio in the interest of the Unit holders. It is also the custodian of all assets of the fund. Under this scheme a holder instead of receiving dividend may reinvest such dividend income accrued for purchasing Unit at a concessional rate. In such case, Units are issued at Tk. 1.00 less than the opening price of the financial year. The total income earned on investment/ deployment of funds, net of expenditures incurred, in a financial year is distributed among the unit holders as dividend. Dividend is normally declared at the end of July each year by the Board of Directors of ICB. Dividend Warrants are dispatched soon after declaration of dividend. 4.7 Conclusion In this chapter, an overview of Mutual Funds in Bangladesh as well as Mutual Funds of ICB are shown. Different activities and history of ICB Mutual Funds of ICB have also been discussed. In the next chapter the performance of these Mutual funds have been shown

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Chapter-5: Performance Analysis of ICB Mutual Funds

Chapter Outline: 5.1 Introduction 5.2. SWOT Analysis 5.3. Quantitative Analysis 5.4 Composite Portfolio Performance Measures 5.5 T-test of ICBMFs 5.6 Conclusion

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5.1. Introduction This chapter includes both qualitative and quantitative analysis of ICB Mutual Funds. In qualitative analysis I have discussed SWOT analysis and in quantitative analysis I have evaluated mutual funds from different view. These are as follows: 5.2. SWOT Analysis SWOT analysis is the detailed study of an organization's exposure and potential in perspective of its Strengths, Weaknesses, Opportunities and Threats. This facilitates the organization to make their existing line of performance and also foresee the future to improve their performance in comparison to their competitors. As though this tool, an organization can also study its current position, it can also be considered as an important tool for making changes in the strategic management of the organization. 5.2.1. Strengths of ICB Mutual Funds: Secured investment option Certain dividend payment Broad market coverage R&D Skills and leadership Human resource competencies Ability to manage strategic change Portfolio management skills Strong financial backup Expert management team Strong network Advance against ICB Mutual Fund certificates Scheme 5.2.2. Weaknesses of ICB Mutual Funds Inadequate information systems Floating of new mutual fund is stopped Declining in R&D innovation Growth without direction High conflict and politics Bureaucratic practice Lack of Discipline Most of the employee are inactive 5.2.3. Opportunities Potential environmental opportunities Diversify into new growth business Reduce rivalry among competitors Government tries boost up capital market Investors are getting confidence over security market 5.2.4. Threats Increases in private substitute competitor No promotional and attractive offer for investors
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Increase in foreign competition People have less knowledge about the capital market There are some unethical practices in security market

5.3. Quantitative Analysis 5.3.1. Return Analysis Average mutual fund returns can be computed as an arithmetic mean or a geometric mean, and there are reasons for using both. Return - Arithmetic Mean Analyst and portfolio manager often want one number that describes the representative possible outcome of an investment decision. The arithmetic mean is by far the most frequently used measure of portfolio return for mutual funds. The arithmetic mean of annual returns is simply a mutual fund's average annual return. It tells how well a fund performed over any particular period of time. Arithmetic
The Arithmetic Mean Returns of ICB Mutual Funds and DGEN and DSE20 are given in the following Exhibit: Name Monthly Return Annualized Return (1stICBMF) (2ndICBMF) (3rdICBMF) (4thICBMF) (5thICBMF) (6thICBMF) (7thICBMF) (8thICBMF) (DGEN) (DSE20) 2.21403% 2.52152% 2.17044% 2.11767% 2.29275% 2.43155% 2.33542% 1.93964% 1.78758% 0.98109% 26.56835% 30.25822% 26.04529% 25.41208% 27.51301% 29.17866% 28.02501% 23.27573% 21.45101% 11.77308%

Table -5.1: Monthly and Annualized returns of ICBMF and DSEGEN and DSE20 The monthly arithmetic mean of the ICB mutual funds are calculated based on the 120 monthly returns (July 2001 to June 2011). The Annualized returns show that all the mutual funds out perform the market return. The return of the 2th ICB M. F. is the highest among all. 5.3.2. Risk Analysis Every type of investment, including mutual funds, involves risk. Risk refers to the possibility losing money (both principal and any earnings) or fails to make money on an investment. A fund's investment objective and its holdings are influential factors in determining how risky a fund is. Here Standard Deviation, Beta, R-squared and Coefficient of Variation have been used to measure the risk of the ICB Mutual Funds. These statistical measures are historical predictors of investment risk/volatility and are all major components of modern portfolio theory
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(MPT). The MPT is a standard financial and academic methodology used for assessing the performance of equity, fixed-income and mutual fund investments by comparing them to market benchmarks. a) Standard Deviations Standard deviation measures the dispersion of data from its mean. In plain language, the more that data is spread apart, the higher the difference is from the norm. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance. The Standard
Name (1stICBMF) (2ndICBMF) (3rdICBMF) (4thICBMF) (5thICBMF) (6thICBMF) (7thICBMF) (8thICBMF) (DGEN) (DSE20) Standard deviation 8.04057% 11.82338% 9.58516% 9.49731% 11.99240% 27.45455% 14.00039% 12.22781% 8.13752% 7.67989%

Table -5.2: Standard deviation of ICBMF, DSEGEN and DSE20 The monthly standard deviation of the return from the ICB mutual funds are calculated based on the 12 monthly returns (July 2001 to June 2011). Total risk of the every mutual fund is higher than that of the market. Sixth ICB Mutual Fund has experienced the highest risk ( 27.45455%) according to the standard deviation of returns. b) Beta Coefficients Beta, also known as the "beta coefficient," is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is calculated using regression analysis, and consider as the tendency of an investment's return to respond to swings in the market. By definition, the market has a beta of 1.0. Individual security and portfolio values are measured according to how they deviate from the market. A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile than the market. Betas for the Eight Mutual Funds of ICB are determined using the following formula:

equation-5.1
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Where: Cov( p m) = covariance between individual mutual funds return and market return Varm = variance of the market return. The beta coefficients for the ICB Mutual Funds from 1st ICB to 8th ICB are given in the following Exhibit:

Name (1stICBMF) (2ndICBMF) (3rdICBMF) (4thICBMF) (5thICBMF) (6thICBMF) (7thICBMF) (8thICBMF) DSEGEN

Beta 0.290333469 0.353755095 0.257675094 0.336138189 0.415684339 0.529488738 0.254526598 0.452061627 1

Table -5.3: Beta of ICBMF and DSEGEN The beta coefficients of the ICB mutual funds are well below in comparison to the market. The calculated betas of the funds indicate low biasness to the market. This beta estimation can be affected by the problem of beta estimation in case of infrequently traded stocks. This is a special problem in small security markets like ours. The beta estimation for thinly traded shares is beyond the scope of this report. So, all the composite portfolio analysis is performed using the above beta coefficients. c) R-squared R-Squared is a statistical measure that represents the percentage of a fund portfolio's or security's movements that can be explained by movements in a benchmark index. Here I consider the DSE General Index as the benchmark index for ICB Mutual Funds. R-squared values range from 0 to 100. A mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. A fund rated 70 or less would not perform like the index. Rsquared values for the Eight. Mutual Funds of ICB are determined using the following formula:

..equation-5.2

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The values of R-squared for ICB Mutual Funds are given in the following Exhibit: Name (1stICBMF) (2ndICBMF) (3rdICBMF) (4thICBMF) (5thICBMF) (6thICBMF) (7thICBMF) (8thICBMF)
R-squared 8.63385% 5.92798% 4.78553% 8.29504% 7.95608% 2.46303% 2.18862% 9.05069%

Table-5.4: R-squared of ICBMF The results of R-squared measures reveal that the movement of return from ICB mutual funds cannot be explained by the return form the benchmark index. Analysts usually recommend Mutual fund investors to avoid actively managed funds with high R-squared ratios, which are generally criticized as being "closet" index funds. Here analysts argue that why anyone should pay the higher fees for so-called professional management when one can get the same or better results from an index fund. 5.4 Composite Portfolio Performance Measures At one time, investors evaluated portfolio performance almost entirely on the basis of the rate of return. They were aware of the concept of risk but did not know how to quantify or measure it, so they could not consider it explicitly. Development in portfolio theory in the early 1960s showed investors how to quantify and measure risk in terms of the volatility of return. Still, because no single measure combined both return risk, the two factors had to be considered separately. Treynor (1965) developed the first composite measure of portfolio that included risk. This section describes in details the three major composite portfolio measures Treynor measure, Sharpe ratio and Jensen measure that combine risk and return performance into a single value. 5.4.1. Treynor Measures Jack L. Treynor was the first to provide investors with a composite measure of portfolio performance that also included risk. Treynor's objective was to find a performance measure that could apply to all investors, regardless of their personal risk preferences. He suggested that there were really two components of risk: the risk produced by fluctuations in the market and the risk arising from the fluctuations of individual securities. Treynor introduced the concept of the security market line, which defines the relationship between portfolio returns and market rates of returns, whereby the slope of the line measures the relative volatility between the portfolio and the market (as represented by beta). The beta coefficient is simply the volatility measure of a stock, portfolio or the market itself. The greater the line's slope, the better the risk-return tradeoff.
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Graph-5.5: showing risk-return tradeoff according to Treynor measure

The Treynor measure, also known as the reward to volatility ratio, can be easily defined as:

..equation-5.3 Where: R = the average rate of return for Portfolio i during a specified time period = the average rate of return on a risk-free investment during the time period i = the slope of the funds characteristics line during that time period The numerator identifies the risk premium and the denominator corresponds with the risk of the portfolio. The resulting value represents the portfolio's return per unit risk. For evaluating the performance of the ICB Mutual Funds from 1st ICB to 8th ICB I have taken 364 days T-bill rate as the risk free rate. The 60 month average 364 days T-bill rate is 6.15%. The average rate of return and Beta coefficient of the market and the eight mutual funds are used.

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Treynor Measures of DSE General Index and ICB Mutual Funds are given in the following Exhibit:

Treynor Measure
Yearly Return 0.265683513 0.302582185 0.260452948 0.254120847 0.275130102 0.291786564 0.280250131 0.232757253 0.214510135 Risk free Return 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 Beta 0.290333469 0.353755095 0.257675094 0.336138189 0.415684339 0.529488738 0.254526598 0.452061627 1 T 0.703272392 0.681494594 0.772107792 0.57304065 0.513923864 0.434922497 0.859439182 0.378836077 0.153010135

(1stICBMF) (2ndICBMF) (3rdICBMF) (4thICBMF) (5thICBMF) (6thICBMF) (7thICBMF) (8thICBMF) DSEGEN

Table-5.6: showing Treynor measure of ICBMF and DSEGEN

According to the measure of Treynor, all the ICB mutual funds have outperformed the market. Among all the Tryenor Measure for Seventh ICB Mutual Fund is the highest. The ranking of the ICB mutual funds are given below in chart:

T
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0

Graph-5.7: showing the measure of T according to Treynor measure

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5.4.2. Sharpe Ratios The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure of the excess return (or Risk Premium) per unit of total risk in an investment asset or a trading strategy, named after William F. Sharpe. The Sharpe ratio is almost identical to the Treynor measure, except that the risk measure is the standard deviation of the portfolio instead of considering only the systematic risk, as represented by beta. The measure followed closely his earlier work on the capital asset pricing model (CAPM), dealing specifically with the capital market line (CML).

Graph-5.7: showing risk-return tradeoff according to Sharpe measure

The Sharpe measure of portfolio performance (designated S) is stated as follows:

.equation-5.4

For measuring the performance of the ICB Mutual Funds from 1st ICB to 8th ICB I have taken 364 days T-bill rate as the risk free rate. The 59 month average 364 days T-bill rate is 6.15%. The average rate of return and standard deviation of the market and the eight mutual funds are used.

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Sharpe Ratios of DSE General Index and ICB Mutual Funds are given in the following Exhibit:

Sharpe Measure
Yearly Return
(1stICBMF) (2ndICBMF) (3rdICBMF) (4thICBMF) (5thICBMF) (6thICBMF) (7thICBMF) (8thICBMF) DSEGEN

0.265683513 0.302582185 0.260452948 0.254120847 0.275130102 0.291786564 0.280250131 0.232757253 0.214510135

Risk free Return 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615

Standard Deviation 0.080405727 0.118233772 0.095851619 0.0949731 0.119924001 0.274545504 0.140003913 0.122278139 0.081375206

S 2.539415046 2.0390298 2.075634713 2.028162141 1.781379038 0.83879197 1.562457261 1.400554954 1.880304123

Table-5.8: showing Sharpe measure of ICBMFs and DSEGEN According to the measure of Sharpe Ratio the some of the ICB Mutual Funds fail to outperform the market. Four Mutual Funds One, two, three and four ICBMF indicate superior risk-adjusted return. If the ratios are plotted in a graph, all the under performing mutual funds will be below the CML line.

S
3 2.5 2 1.5 1 0.5 0

Graph-5.9: showing Sharpe measure of ICBMFs and DSE

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5.4.3. Jensen Measures Like the previous performance measures discussed, the Jensen measure is also based on CAPM. Named after its creator, Michael C. Jensen, the Jensen measure calculates the excess return that a portfolio generates over its expected return. This measure is also known as Alpha. Jensens measure is calculated as: ..equation-5.5 Where: Rp = the average rate of return for Portfolio i during a specified time period RFR = the average rate of return on a risk-free investment during the time period Bp = the slope of the funds characteristics line during that time period Rm = the expected return on the market portfolio of risky assets The Jensen ratio measures how much of the portfolio's rate of return is attributable to the manager's ability to deliver above-average returns, adjusted for market risk. The higher the ratio, the better the risk-adjusted returns. For assessing the performance of the ICB Mutual Funds from 1st ICB to 8th ICB I have taken 364 days T-bill rate as the risk free rate. The 60 month average 364 days T-bill rate is 6.15%. The average rate of return and Beta coefficient of the market and the eight mutual funds are used. Expected return on the market portfolio of risky assets is calculated based on the average 120 monthly return (June 2001 to July 2011) of DSE General Index. Annualized return of the DGEN is finally considered as the market return. Here the annualized market return is 21.45%. Jensen Alpha measures of ICB Mutual Funds are given in the following Exhibit :

Jensen Measure
DSEGEN(MAR KET) (1stICBM F) (2ndICB MF) (3rdICB MF) (4thICB MF) (5thICB MF) (6thICB MF) (7thICB MF) (8thICB MF) 0.214510135 0.214510135 0.214510135 0.214510135 0.214510135 0.214510135 0.214510135 0.214510135 Yearly Return(ICBMF) 0.265683513 0.302582185 0.260452948 0.254120847 0.275130102 0.291786564 0.280250131 0.232757253 Risk free Return 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 0.0615 Beta 0.290333 469 0.353755 095 0.257675 094 0.336138 189 0.415684 339 0.529488 738 0.254526 598 0.452061 627

P=Rp-{Rf+(RmRf)*} 0.15975955 0.18695407 0.159526047 0.141188297 0.150026185 0.14926942 0.179804982 0.102087243

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Table-5.8: showing Jensen Measure of ICBMFs According to the measure of Jensens Alpha all the mutual funds of ICB have managed to generate positive excess return adjusted for market risk. Among all the Second ICB Mutual Fund has generated the highest alpha (18.69%). According to Jensen measure Second ICB Mutual Fund is the best performing of and Third ICB Mutual Fund is the worst performing among all the eight mutual funds managed by ICB. 5.4.3. Famas Decomposition Following the work of Treynor, Sharpe ad Jensen; Fama (1972) suggested a somewhat finer breakdown of portfolio performance. The basic premises for Famas technique is that overall performance of a portfolio, which is its return in excess of the risk-free rate, can be decomposed into measures of risk taking and security selection skill. That is, Overall Performance = Excess Return = Portfolio Risk + Selectivity The selectivity component represents the portion of the portfolios actual return beyond that available to an unmanaged portfolio with identical systematic risk. Thus this selectivity measure is used to assess the managers investment competency. Famas Decomposition: Risk Risk is the portion of the excess return that is explained by the portfolio beta and the market risk premium: equation-5.6 Where: Risk RP = Portion of portfolio excess return due to risk taking Bp = the slope of the funds characteristics line during that time period Rm = the expected return on the market portfolio of risky assets RFR = the average rate of return on a risk-free investment during the time period
Here, the portion of excess returns of the ICB Mutual Funds that can be explained by the mutual funds beta and the market risk premium are given in the following Exhibit: Name Rm Rf p RP risk= p(RmRf) 4.44240% 5.41281% 3.94269% 5.14325% 6.36039% 8.10171% 3.89451% 6.91700%

(1stICBMF) (2ndICBMF) (3rdICBMF) (4thICBMF) (5thICBMF) (6thICBMF) (7thICBMF) (8thICBMF)

21.45101% 21.45101% 21.45101% 21.45101% 21.45101% 21.45101% 21.45101% 21.45101%

6.15% 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% 6.15%

0.290333469 0.353755095 0.257675094 0.336138189 0.415684339 0.529488738 0.254526598 0.452061627

Table-5.10: showing excess returns of the ICB Mutual Funds that can be explained by the mutual
funds beta and the market risk premium 48

Famas Decomposition: Selectivity Selectivity is the portion of the excess return that is not explained by the portfolio beta and the market risk premium. Since it cannot be explained by risk, it must be due to superior security selection. equation-5.7
Where:

RP Selectivity = Portion of portfolio excess return due to selectivity (superior security selection) RP Total =Total excess return of the portfolio; p R RFR Bp = the slope of the funds characteristics line during that time period Rm = the expected return on the market portfolio of risky assets RFR = the average rate of return on a risk-free investment during the time period Here, the portions of excess returns of the ICB Mutual Funds due to selectivity are given in the following Exhibit:
Selectivity Name 1st ICB 2nd ICB 3rd ICB 4th ICB 5th ICB 6th ICB 7th ICB 8th ICB Rp (Annual) 26.56835% 30.25822% 26.04529% 25.41208% 27.51301% 29.17866% 28.02501% 23.27573% Rf( Annual) 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% RP risk= p(Rm-Rf) 4.44240% 5.41281% 3.94269% 5.14325% 6.36039% 8.10171% 3.89451% 6.91700% RP total 20.41835% 24.10822% 19.89529% 19.26208% 21.36301% 23.02866% 21.87501% 17.12573% RP selectivity 15.97595% 18.69541% 15.95260% 14.11883% 15.00262% 14.92694% 17.98050% 10.20872%

Table-5.11: Showing excess returns of the ICB Mutual Funds due to selectivity

Famas Decomposition: Diversification Diversification is the difference between the return that should have been earned according to the CML and the return that should have been earned according to the SML. 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.

..equation-5.8
49

Where:

Bp = the slope of the funds characteristics line during that time period Rm = the expected return on the market portfolio of risky assets RFR = the average rate of return on a risk-free investment during the time period 6p = standard deviation of the specific mutual fund 6m = standard deviation of the market Here the difference between the return that should have been earned according to the CML and the return that should have been earned according to the SML or the diversification of the ICB Mutual Funds from 1st ICB to 8th ICB are given in the following Exhibit:
Rm 1st ICB 2nd ICB 3rd ICB 4th ICB 5th ICB 6th ICB 7th ICB 8th ICB 21.45101% 21.45101% 21.45101% 21.45101% 21.45101% 21.45101% 21.45101% 21.45101% Rf 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% 6.15% p 0.290333469 0.353755095 0.257675094 0.336138189 0.415684339 0.529488738 0.254526598 0.452061627

p
0.080405727 0.118233772 0.095851619 0.0949731 0.119924001 0.274545504 0.140003913 0.122278139

m
0.081375206 0.081375206 0.081375206 0.081375206 0.081375206 0.081375206 0.081375206 0.081375206

RP diversification 0.106763257 0.168187335 0.140803293 0.127145762 0.161889677 0.435211899 0.224304786 0.160750078

Table-5.12: Showing excess returns of the ICB Mutual Funds due to diversification

Famas Decomposition: Net Selectivity Selectivity is made up of two components: Net Selectivity and Diversification. Diversification is included because part of the managers skill involves knowing how much to diversify. Selectivity = Net Selectivity + Diversification We can determine how much of the risk premium comes from ability to select stocks (net selectivity) by subtracting diversification from selectivity. Because the diversification measure is always nonnegative, net selectivity will always be equal to or less than gross selectivity. Net Selectivity = Selectivity Diversification Net selectivity measures how well the portfolio manager did at earning a fair return for the portfolios 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.

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Net Selectivity of the Eight ICB Mutual Funds from 1st ICB to 8th ICB are given in the following Exhibit: Name 1st ICB 2nd ICB 3rd ICB 4th ICB 5th ICB 6th ICB 7th ICB 8th ICB RP selectivity 15.97595% 18.69541% 15.95260% 14.11883% 15.00262% 14.92694% 17.98050% 10.20872% RP diversification 10.67633% 16.81873% 14.08033% 12.71458% 16.18897% 43.52119% 22.43048% 16.07501% Net Selectivity 5.29963% 1.87667% 1.87228% 1.40425% -1.18635% -28.59425% -4.44998% -5.86628%

Table-5.13: Showing net selectivity of ICB Mutual Funds

The results of the above calculation show that one to fourth ICB Mutual Fund have positive net selectivity and all the remaining funds experienced negative net selectivity. It indicates that, in most of the cases, except those two funds portfolio managers of ICB fail to diversify away the unsystematic risk properly through their portfolio selection ability.

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5.5. T-Test of Hypothesis on ICB Mutual Funds Question: Whether the average of ICB Mutual Fund return is differing from DSEGEN return H0: = : there is no significant difference between mean of First ICB Mutual Fund return and DSEGEN return . H1: : there is significant difference between mean of First ICB Mutual Fund return and DSEGEN return. Here assumed level of significant is 5% and the appropriate test is T-test. 1st ICBMF:
t-Test: Two-Sample Assuming Equal Variances Variable 1 0.02214 0.006465 120 0.006544 0 238 0.408351 0.341692 1.651281 0.683383 1.969981 Table-5.14 2nd ICBMF: t-Test: Two-Sample Assuming Equal Variances Variable 1 0.025215 0.013979 120 0.010301 0 238 0.560147 0.287953 1.651281 0.575906 1.969981 Table-5.15 Variable 2 0.017876 0.006622 120 Variable 2 0.017876 0.006622 120

Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail

Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail

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3rd ICBMF: t-Test: Two-Sample Assuming Equal Variances Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table-5.16 4th ICBMF: t-Test: Two-Sample Assuming Equal Variances Variable 1 0.021177 0.00902 120 0.007821 0 238 0.28912 0.386371 1.651281 0.772741 1.969981 Table-5.17 Variable 2 0.017876 0.006622 120 0.021704 0.009188 120 0.007905 0 238 0.333556 0.369504 1.651281 0.739008 1.969981 Variable 2 0.017876 0.006622 120

Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail

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5th ICBMF:
t-Test: Two-Sample Assuming Equal Variances Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table-5.18 0.022928 0.014382 120 0.010502 0 238 0.381836 0.351462 1.651281 0.702923 1.969981 Variable 2 0.017876 0.006622 120

6 ICBMF:
t-Test: Two-Sample Assuming Equal Variances Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table-5.19 0.024316 0.075375 120 0.040999 0 238 0.246353 0.402811 1.651281 0.805622 1.969981 Variable 2 0.017876 0.006622 120

th

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7th ICBMF:
t-Test: Two-Sample Assuming Equal Variances

Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table-5.20 0.023354 0.019601 120 0.013112 0 238 0.370593 0.355635 1.651281 0.71127 1.969981

Variable 2 0.017876 0.006622 120

8th ICBMF:
t-Test: Two-Sample Assuming Equal Variances

Variable 1 Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail Table-5.21 0.019396 0.014952 120 0.010787 0 238 0.113407 0.454902 1.651281 0.909804 1.969981

Variable 2 0.017876 0.006622 120

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Here, all the calculated value of Test is (t Stat) of each ICBMF. For 238 degrees of freedom at 5% level of significance, table value of test is (t critical two- tail) = 1.969981. So, calculated value of each ICBMF is smaller than table value (1.969981). So, the null hypothesis cannot be rejected and there is no significant difference between mean return from ICB Mutual funds and mean return from DSEGEN. 5.6. Conclusion of this chapter: In this chapter at first SWOT analysis has been shown, Then Treynor, Sharepe, Jensen, Fama;s decomposition and at last T-test of Mutual Funds have been shown. In the next chapter I have discussed the findings and conclusion of this project.

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Chapter-6: Findings and Conclusion

Chapter Outline: 6.1. Findings of the study 6.2 Conclusion

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6.1. Findings of the Study The primary objective of the study is to evaluate the portfolio performance of the ICB Mutual Funds based on the composite portfolio performance measures and the composition analysis of the funds portfolios. The results of the study have helped to draw some key findings about the performance of the ICB Mutual Funds. - Treynor measures and Sharpe Ratios have provided different ranking of the mutual funds. The underlying logic behind the difference is diversification. The portfolios of ICB Mutual Funds are not completely diversified. As a result poorly diversified portfolios (such as Seventh ICB Mutual Fund) had high ranking on the basis of the Treynor measure. - Famas Return Decomposition has indicated positive selectivity for some of the ICB Mutual Funds except 5th, 6th 7th, and 8th ICB Mutual Fund. It reveals the fact that in most of the cases, except those for first four funds, portfolio managers of ICB fail to diversify away the unsystematic risk properly through their portfolio selection strategy. - Portfolios of all the ICB Mutual Funds are highly dominated and concentrated to a few number of stocks. - Sectorial domination is also very high in the portfolios of ICB Mutual Funds. - ICB as the fund manager mainly focuses on the stocks of high market capitalized and highly profitable companies. Earning multipliers, price-to-book value ratios and dividend history are also considered at the time of constructing or rebalancing the portfolios. - ICB Mutual Funds have been declaring high cash dividends compare to the industry average. - There is no significant difference between mean return from ICB Mutual funds and mean return from DSEGEN.

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6.2. Conclusion This study has been conducted with a view to understand the operations and management of investment banking in Bangladesh in light of the role of Investment Corporation of Bangladesh (ICB) as the market maker. Since inception, ICB has been helping to ensure a healthy and well organized secondary market. The mutual funds of ICB have been trying to facilitate and stabilize the secondary markets of our country for several decades. These funds have been playing the key role to ensure the liquidity of security transaction in the burses. ICB usually stands its position against the hard effect and try to ensure the supply and demand of securities in the markets through its own portfolio and the mutual funds. Though the composite performance measures have shown some shortcomings in managing the portfolios, ICB Mutual Funds are considered as some of the best and safest investment tools in our secondary markets. The area of operations and scope of activities of ICB has been narrowed down by the creation of three subsidiary companies under Capital Market Development Program (CMDP) initiated by the Government of Bangladesh (GOB) and the Asian Development Bank (ADB).

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References
1 Chen, Z. P. (1996). Portfolio Performance Measurement: Theory and Applications. The Review of Financial Studies Summer , 9 (2), pp. 511555. 2 Shahid, M. (2007). Measuring Portfolio Performance. Uppsala University, Department of Mathematics. Uppsala, Sweden: U.U.D.M. Project Report. 3 Brown, Reilly (2008). Investment Analysis and Portfolio Management (8th Edition ed.). Thomson South-Western. 4 Fama, E. F. (1972, June). Components of Investment Performance. Journal of Finance . 5. ICB, viewed 20nd October 2011, Available from http://www.icb.gov.bd/objective.php 6. ICB, viewed 20nd October 2011, Available from http://www.icb.gov.bd/bpolicy.php 7. ICB, viewed 21nd October 2011, Available from http://www.icb.gov.bd/bfunction.php 8 .Investment Corporation of Bangladesh. "Annual Report 2009-2010." 9 Fabozzi, Modigliani, Jones, Ferri. Foundations of Financial Markets and Institutions. 3rd Edition. Pearson Education, Inc., 2002. 10 ICB, viewed 26nd October 2011, Available from http://www.icb.gov.bd/mutual_fund.php 11 ICB, viewed 26nd October 2011, Available from http://www.icb.gov.bd/unit_fund.php
12.Chen, Zhiwu, Peter J. Knez. "Portfolio Performance Measurement: Theory and Applications." The Review of Financial Studies Summer, 1996: 511555. 13. Dhaka Stock Exchange Limited. Dhaka Stock Exchange. 2010. 14. ICB, viewed 24nd October 2011, Available from: http://www.dsebd.org/latest_share_price_scroll_l.php. 15.Douglas A. Lind, William G. Marchal, Samuel A. Wathen. Statistical Techniques in Business & Economics. 12th Edition. McGraw-Hill/Irwin, 2005. 16.Fabozzi, Modigliani, Jones, Ferri. Foundations of Financial Markets and Institutions. 3rd Edition. Pearson Education, Inc., 2002. 17.Fama, Eugene F. "Components of Investment Performance." Journal of Finance, June 1972. Frank K. Reilly, Keith C. Brown. Investment Analysis and Portfolio Management. 8th Edition. Thomson South-Western, 2008.

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18.Investment Corporation of Bangladesh. "Annual Report 2006-07." Audited Financial Statements of ICB Mutual Funds, 2008. 19.Investment Corporation of Bangladesh. "Annual Report 2008-09." Audited Financial Statements, 2009. 20.Investment Corporation of Bangladesh. "Annual Report 2008-09." Audited Financial Statements of ICB Unit Fund, 2009. 21.Investopedia ULC. 2010. http://www.investopedia.com/. 22.John F. Marshall, M. E. Ellis. Investment Banking & Brokarage. Illustrated. McGraw Hill, 1995. Securities and Exchange Commission. Securities Related Laws. 2010.

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Appendices
1. 2. 3. 4. 5. 6. 7. Calculation Of Return Return Series Beta Calculation Treynor Measurement Sharpe Measurement Jensen Measurement Fama Decomposition

62