the performance of investment companies in russia

8/18/2019 THE PERFORMANCE OF INVESTMENT COMPANIES IN RUSSIA

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Master in Finance & Banking

(2013/2014)

THE PERFORMANE OF !N"E#TMENT OMPAN!E# !N R$##!A

%ern' #'etana

a*an'a Ekaterina

I

ndex

1INTRODUCTION……………………………………………………………………..………….4

2 PERFORMANCE OF INVESTMENTFUNDS ……………………………….……..…………...……7

2.1. ROLE OF INVESTMENT

FUNDS…………………………………………………….……….….7


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2.2 HISTORY OF INVESTMENTCOMPANIES (IC)………………………………………….…….…7

2. THE MAIN TYPES OF INVESTMENT

COMPANIES (IC)!………………………………….…..…."

2.3.1 OPEN-END FUNDS (“MUTUALFUNDS”)…………………………………………………..…."

2.3.2 CLOSED-ENDFUNDS……………………………………………………….…..………...…..#

2.3.3 INTERVAL FUNDS (INF)

…………………………………………………….…..…….…..….#

2.3.4 EXCHANGE-TRADED FUNDS(ETFS)……………………………………………………......#

INVESTIN$ INRUSSIA……………………………………………………...………………1%

.1 REASONS &HY INVEST INRUSSIA……………………………………………………………1%

.2 RUSSIA IN 'LOOM'ER$S 'ESTCOUNTRIES FOR 'USINESS*RAN+IN$…………………12

. INVESTOR PERSPECTIVE ONRUSSIA………………………………………………..……….12

4 DEVELOPMENT OFINVESTMENT FUNDS INRUSSIA…………………….…………1

4.1 PERFORMANCE OF OPEN,END-CLOSED,END AND INTERVAL FUNDS…………………..…..14.2 INTRODUCTION OF ECHAN$ETRADED FUNDS (ETF) INRUSSIA………………………….2

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4.2.1 BENEFITS AND RISS OF ARUSSIANETF…………………………………………..….…2/

4. TAATION OF INVESTMENT FUNDS

INRUSSIA……………………………………………….20

+ THEORETICAL'AC+$ROUND……………………………………………….…………2"

/.1 THE EFFICIENT MAR+ETHYPOTHESIS

…………………………………………….…………2"

/.2 THE CAPITAL ASSET PRICIN$MODEL………………………………………………….…...2"

!.2.1 THE "ENSEN ALPHA………………………………………………………………………..1

!.2.2 THE F AMA-FRENCH 3-FACTORMODEL

…………………………………………

….……..1/. THE SHARPE RATIO…………………………………………………………………………..2

/.4 TREYNORRATIO………………………………………………………………………………

/./ EPECTEDRETURN…………………………………………………………………………

..4

/.0 VARIANCE AND STANDARDDEVIATION……………………………………………….……..4

/.7'ETA…………………………………………………………………………………………../

/." PORTFOLIOMANA$EMENT…………………………………………………………………../

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, PRACTICAL'AC+$ROUND…………………………………………………………….."

0.1 FINDIN$ OUT THE 'ESTINVESTMENT

FUNDS…………………………………………….….."

0.2 RECOMMENDATIONS FORINVESTORS

………………………………………………………47

7CONCLUSIONS………………………………………………………………………….……./%

#'I'LIO$RAPHY…………………………………………………..…………………..…….../1

#ANNE…………………………………………………..

……………………………….……../

#.1 OPEN,END 'ONDSFUNDS…………………………………………..…..……………………/

#.2 OPEN,END EUITYFUNDS…………………………………………………….………….…../4

#. INTERVAL EUITYFUNDS…………………………………

………………………..….……..//#.4 INTERVAL 'LENDFUNDS…………………………………………………………..……..…./0

#./ CLOSE,END REITFUNDS…………………………………………………………..………./7

#.0 TA'LE INDEMICE………………………………………………………………………../"

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#.7RIS+,FREE RUSSIA 1%,YEAR'OND………………………………………………….………/#

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1 In3d56nEconomic growth is one of

the most important goals for the

country. Achievement of such goal

depends on attraction of surplus

funds for the further direction in

production or social spheres.

Investment fund is one of the

cooperative investment forms and it

is really attractive and available for a

private investor who is willing to

invest their money for short-term or

long-term period of time.

Investment funds appeared inEurope at the end of XVII century

and became very popular in the

world in the middle of XX century.

In Russia first investment funds

were created only in 1! and

developed very "uic#ly. It must be

ta#en into account$ that in recent

years investment funds in Russia

became one of the most important

sources for collective investment.

According to several rating

companies$ nowadays Russia is an

attractive country for investment due

to several reasons. In %&1'$ Russia

(oined the top-1& countries

considered the most important for

business development by the global

business leaders. )he Russian

authorities consider improving theinvestment climate to be a top

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priority. )he *overnment has set the

ambitious goal of raising the

country+s position in the ,orld

an#+s oing usiness ran#ing from

1%&th in %&11 to %&th by %&1/. In%&10 Russia already ta#es %nd

place. )he country+s national debt is

minimal by international standards$

about 1% of *2. 3urthermore$

Russia became a fully-fledged

member of the ,)4 in 5uly %&1%.

)he ,orld an# believes that ,)4

accession will add '.' to the

country+s *2 for the ne6t three

years and up to 11 by the ne6t

decade.

In Russia$ Investment

companies 7I89 provide an e6cellent

opportunity for investment. I8

provide investment management and

boo##eeping services to investors

who do not have the time or

e6pertise to manage their own

portfolios. )hey are financialintermediaries that receive funds

from individual investors and invest

those funds in a potentially wide

range of securities or other assets.

Integration of assets is the #ey idea

behind I8.

Each investor has a claim to

the portfolio introduced by the I8 in

proportion to the amount invested.

)hese companies thus provide a

mechanism for small investors to

:team up; to obtain the benefits of

large-scale investing.

I8 perform several important

functions for their investors<

1. Record #eeping and

administration. I8 issue periodic

status reports$ #eeping trac# of

capital gains distributions$dividends$ investments$ and

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repayment$ and they may reinvest

dividend and interest income for

shareholders.

%. iversification and divisibility.

y pooling their money$ I8 enableinvestors to hold fractional shares of

many different securities. )hey can

act as large investors even if any

individual shareholder cannot.

'. 2rofessional management. =ost$

but not all$ I8 have full-time staffs

of security analysts and portfolio

managers who attempt to achieve

superior investment results for their

investors.

0. >ower transaction costs. ecause

they trade large bloc#s of securities$

I8 can achieve substantial savings

on bro#erage fees and commissions.

,hile all I8 pool the assets

of individual investors$ they also

need to divide claims to those assets

among those investors. Investors buy

shares in I8$ and ownership is proportional to the number of shares

purchased. )he value of each share

is called the net asset value$ or

?AV.?et asset value e"uals =ar#et

value of assets minus liabilities@

hares outstanding$ see odie

7%&&B9. )here is a wide range of I8

that invest in different asset classes

and with different investment

ob(ectives. I8 can be actively

managed or passively managed

versus an inde6.

In this paper we will

investigate the conception$ history

and types of investment funds and

characteriCe prospects for the

Russian financial mar#et for

investors. ,e will e6amine different

types of funds and its performancefrom 1!- %&10 using well #nown

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investment performance measures as

harpe Ratio$ 5ensen+s Alpha and

)reynor Ratio.

3or the empirical analysis we

will choose %& investment fundsamong a large variety of them. In

particular$ we will focus on four

funds from each of the B following

big categories< open-end stoc#s$

open-end bonds$ closed-end REI)

7real-estate investment trust9$

interval stoc#s and interval blend.

election is based on popularity and

?AV. )hese %& funds will be ran#ed

according to the average of the three

standard investment performance

mentioned above$ and will allow us

to ma#e recommendation for ris#y

as well as ris#-averse investors.

)he results of this research

may be used by financial consultants

and managers who are wor#ing with

clients of asset management

companies. 4ur recommendationscan help to asset management

companies to improve investment

funds management efficiency and be

also used as an e6cellent mar#eting

strategy. ,e also highlight the

interest that this pro(ect might have

for application in finance and

ban#ing academic courses.

)he reminder of the pro(ect

is organiCed as follows. ection %

e6plains definition of investment

funds$ different types of funds$ role

and history of funds+ creation.

ection ' describes briefly reasons

why Russia is a great country for

investment. ection 0 presents

development of Investment funds in

Russia. At that section you can find

funds+ types and categoriesdescription$ growth dynamics of

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assets management companies+$

funds and ?AV "uantity$ the

percentage of different funds+

categories$ and review of the

e6change trade funds 7E)39 performance in Russia. In ection B

you can find theoretical bac#ground

for our calculation. ection !

presents the main results of our

calculation$ introduces the data and

recommendation for investors. And

finally$ ection D gives the main

conclusion.

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2PERFORMANCE OF

INVESTMENT FUNDS

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investments without reducing thee6pected return of the investment.2ooling allows individuals to investin the more li"uid assets of thefinancial intermediary$ while the

intermediary can invest in less li"uidand longer-term investments.

In addition to capital$investment funds may offer

privatiCed businesses managemente6pertise and e6panded access tocapital or other businessrelationships. )hey may also serveas a chec# on the actions of managements and boards of directors to ensure that they remain

accountable to the shareholders=ar# 5. Roe 7109

)his monitoring functionmay be especially important inEastern Europe$ where mass

privatiCation schemes have resultedin diffused ownership. ecause of the relatively small ownership sta#esdistributed in privatiCation$individual shareholders will

probably be unable to e6erciseeffective control over themanagement of enterprises.

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to H.. shores. In 1/!/$ the 3oreign

and 8olonial *overnment )rust

formed in >ondon. )his trust

resembled the H.. fund model in

basic structure$ providing :theinvestor of moderate means the same

advantages as the large capitalists by

spreading the investment over a

number of different stoc#s.;

7Rouwenhorst$ %&&/9.

2erhaps more importantly$

the ritish fund model established a

direct lin# with H.. securities

mar#ets$ helping to finance thedevelopment of the post8ivil ,ar

H.. economy. )he cottish

American Investment )rust$ formed

on 3ebruary 1$ 1/D'$ by fund

pioneer Robert 3leming$ invested in

the economic potential of the Hnited

tates$ chiefly through American

railroad bonds. =any other trusts

followed that not only targetedinvestment in America$ but also led

to the introduction of the fund

investing concept on H.. shores in

the late 1/&&s and early 1&&s.

)he first mutual$ or :open-

end$; fund was introduced in oston

in =arch 1%0. )he =assachusetts

Investors )rust introduced important

innovations to the investment

company concept by establishing a

simplified capital structure$

continuous offering of shares$ the

ability to redeem shares rather than

hold them until dissolution of the

fund$ and a set of clear investment

restrictions and policies.

)he stoc# mar#et crash of 1% and the *reat epression that

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followed hampered the growth of

pooled investments until a

succession of landmar# securities

laws$ beginning with the ecurities

Act of 1'' and concluding with theInvestment 8ompany Act of 10&$

reinvigorated investor confidence.

Renewed investor confidence and

many innovations led to relatively

steady growth in industry assets and

number of accounts. 7Rouwenhorst$

%&&/9.

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being redeemed. )he per share price

is determined by the net value of all

assets held by the fund$ divided by

the number of shares.

4pen-end funds are by far

the most popular among typical

investors. ,ith an open-end fund$

you can participate in the mar#ets

and have a great deal of fle6ibility

regarding how and when you

purchase shares. Also$ you are never

re"uired to purchase shares at a

premium.

2..2 C8;ed,end 95nd;

espite the name similarities$ a

closed-end fund has little in common

with a conventional mutual fund$

which is technically #nown as an

open-end fund.

)he former raises a

prescribed amount of capital only

once through an I247Initial 2ublic

4ffering9 by issuing a fi6ed number

of shares$ which are purchased byinvestors in the closed-end fund as

stoc#. Hnli#e regular stoc#s$ closed-

end fund stoc# represents an interest

in a specialiCed portfolio of

securities that is actively managed

by an investment advisor and which

typically concentrates on a specific

industry$ geographic mar#et$ or

sector. )he stoc# prices of a closed-

end fund fluctuate according to

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mar#et forces 7supply and demand9

as well as the changing values of the

securities in the fundKs holdings.

o$ a closed-end fund has a

fi6ed number of shares. Lou do not

purchase new shares from the fundJ

instead$ you purchase e6isting shares

from other investors. hares are

typically traded on an open mar#et

7stoc# e6change9 where they sell at

either a premium or a discount$

depending on demand. 8losed-end

funds are typically more volatile and

behave more li#e individual stoc#s.

2.. Ine3:?8 95nd; (INF)

An Interval 3und 7:I?3;9 is a typeof closed-end fund that periodicallyoffers to buy bac# a portion of itsshares from the shareholders. I?3s

differ from traditional closed-endedfunds in that their shares do not tradeon the secondary mar#et$ but aresub(ect to periodic 7e.g.$ monthly$"uarterly or annually9 repurchaseoffers by the I?3 at a price based onthe 3undKs net asset value 7:?AV;9at a specified date. In addition$ I?3sare permitted to offer their sharescontinuously at a price based on the3undKs ?AV.

• hares may be purchased at

?AV 7net of sales charges9.

• hareholder withdrawal from

an I?3 is affected through periodic tender offers for thefundsK shares which areaffected at ?AV.

• =ust charge the same level

of fees to all investors in afund.

• oes not offer multipleclasses of shares.

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•

2..4 Ex6@?ne,3?ded95nd; (ETF;)

A security that trac#s an inde6$ acommodity or a bas#et of assets li#ean inde6 fund$ but trades li#e a stoc# on an e6change. E)3s e6perience

price changes throughout the day asthey are bought and sold. ecause ittrades li#e a stoc#$ an E)3 does nothave its net asset value 7?AV9calculated every day li#e a mutualfund does.

y owning an E)3$ you get

the diversification of an inde6 fundas well as the ability to sell short$

buy on margin and purchase as littleas one share. Another advantage isthat the e6pense ratios for mostE)3s are lower than those of theaverage mutual fund. ,hen buyingand selling E)3s$ you have to paythe same commission to your bro#er that you had pay on any regular order.

INVESTIN$ IN RUSSIA

.1Re?;n; B@= n:e; n

R5;;?.

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Russia is a vast country thatstretches from Europe to the 3ar East. )o the west$ it borders H#raine$elarus$ 2oland and the altic

statesJ to the north$ 3inland and ?orwayJ and to the south$ *eorgia$ACerbai(an$ aCa#hstan$ =ongolia$8hina and ?orth orea. Russia has acoastline on three oceans< the Arctic$the Atlantic and the 2acific.

As for foreign investment$for the purposes of economicmoderniCation$ it is worth notingthat in the Russian 3ederation therewas established in %&11 irectInvestment 3und 7RI39. Russia+s=inistry of Economic evelopmentacts as an investment ombudsman byreceiving complaints and helping toresolve issues. 3urthermore$ Russiahas recently set up a businessombudsman in order to protect therights of businesses when faced withadministrative barriers or

bureaucratic pressure.

)he roadmaps focus on themost vulnerable aspects of theRussian investment climate and aimto reduce administrative barriers$improve customs and ta6 regulation$

protect investors+ rights$ facilitatestate registration of legal entities andthe procedure of getting construction

permits$ increase access to ban# loans and energy infrastructure$ and

promote competition.

3rom 1!-%&1' we can seethe following results in the Russian3ederation<

• Russia is the world+s !th

largest economy by *272229.

• 3oreign direct investment

into Russia amounted toM0bn in %&1' 7increased by/' L4L9$ which placesRussia 'rd in a globalran#ing on 3I inflow after HA and 8hina.

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• Russia has one of the largest

domestic mar#ets in theworld$ ran#ing /th among10/ countries.

• Russia has one of the lowest

levels of public debt of anyma(or economy.

• Russia+s middle class tripled

in the last B years.

• *2 per capita 72229 is the

largest among RI8countries.

• >ow unemployment rate of

B.B.1

)herefore$ according to the

Hnited ?ations 8onference on )radeand evelopment 7H?8)A9$ theinflow of foreign direct investments73I9 in the Russian economyincreased /' percent in %&1' year-on-year. )otal level of 3I reachedH M0 billion as of the end of %&1'.)hese recently-published figuresconfirm Russia+s appeal as mar#etworth investing. ,hat is more$international ratings agency 3itch

recently weighed in on Russia+scredit outloo#$ confirming a positivelong-term foreign and nationalcurrency issuer default rating 7IR9of with a table 4utloo#.Russia+s senior unsecured foreignand local currency bond ratings werealso affirmed at .

o$ 3itch cited #ey ratingdrivers including<

• >ow government debt$ at less

than 11 percent of *2

• overeign net foreign assets

of %' percent of *2

• Increase of local currency

value of oil revenues in lightof ruble depreciation

• )he proposed transfer of M!

billion by the Russian

1 Data adapted from

https://www.pwc.ru/19


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government to the Reserve3und

• E6pected growth of % percent

in %&10$ driven by privateconsumption 7espite a

recent slowdown in Russia+s*2 beyond e6pectations$largely due to a decline ininvestment$ 3itch predictedthat these effects are li#elytemporary9

3itch also made recommendationsthat could help boost Russia+sratings in the future$ including<reduction in vulnerability to oil priceshoc#s$ either via fiscal reform or gradual building of the Reserve3und as a buffer. >onger trac# record of lower inflation

0

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1200

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than 0& )I=E 71- M 1% bnJ%&1'- M B1& bn9. )otal value of assets of Russian ban#ing systemrose '& )I=E 71- M B bnJ%&1'- M 1$DB0 bn9 8apitaliCation of

the Russian stoc# mar#et grewalmost %& )I=E 71- M 0& bnJ%&1'- M DD% bn9. Average nominalmonthly wage grew 1B times. M71- M!1J %&1'-M0&9

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. In:e;3 >e3;>e6:en R5;;?

According to the source Russianirect Investment 3und$ over D&

of investors who previously investedin Russia are happy about their decision.

/% of investors areconvinced that the large domesticmar#et$ developing consumer finance sector$ growing levels of savings and personal income presentattractive investment opportunities.

D% of investors positivelyvalue the economic policy and

legislative changes introduced by theRussian government to improve theinvestment climate

/0 of respondents notedthat (oining the ,)4 had asignificant positive impact on theRussian investment climate

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Finvestment company+ is not thesame thing that in the Hnited tates.In Russia investment companies isthe same thing as investment ban# inHA. In Russia we use the term

Investment funds instead of Investments companies.

In Russian 3ederation fundsruled by asset managementcompanies. =oreover$ assetmanagement companies is a trusteeof<

• 3und+s assets of collective

investment

• pension savings

• mortgage pool

• endowment of

noncommercial organiCation

• insurance funds of insurance

company

?owadays there are ' types of Investment funds<

• 4pen-end fund- when every

wor#ing day it is obligatory

buy and sell shares• Interval fund- a fund that

combines the features of open-ended and closed-ended schemes$ ma#ing thefund open for sale or redemption during pre-determined intervals. InRussia at least annually.

• 8losed end fundas a rule

does not buy bac# shares

before fund+s closing.Investors may sell shares onsecondary offering and thatis not easy. )he thing thatclosed end fund was createdfor special interests group.

And 1B categories of funds<#tck -.n A stoc# fund or

e"uity fund is a fund that invests instoc#s

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Bn -.n- A bond fund or debt fund is a fund that invests in

bonds$ or other debt securities.Ben -.n-A mutual fund

whose assets are composed of a

combination of stoc#s$ bonds$ andmoney mar#et securities$ rather than

(ust one or two of these asset classes.)his enables investors to diversifytheir holdings with a single fund.ince blend funds vary considerablyin composition is difficult to ma#egeneraliCations about their

performance or ris# level$ butusually they are somewhat less ris#ythan stoc# mutual funds and

somewhat more ris#y than bondfunds or money mar#et mutualfunds. also called hybrid funds.

A *ne *arket -.n 7also#nown as money mar#et mutualfund9- is an open-ended mutual fundthat invests in short-term debtsecurities such as commercial

papers.An ine -.n 7also inde6

trac#er9 -is a collective investmentscheme 7usually a mutual fund or e6change-traded fund9 that aims toreplicate the movements of an inde6of a specific financial mar#et$ or aset of rules of ownership that areheld constant$ regardless of mar#etconditions.

A -.n - -.ns (FOF)

-is an investment strategy of holdinga portfolio of other investment funds

rather than investing directly instoc#s$ bonds or other securities.)his type of investing is oftenreferred to as multi-manager investment. A fund of funds may beNfetteredN$ meaning that it investsonly in funds managed by the sameinvestment company$ or NunfetteredN$ meaning that it caninvest in e6ternal funds.

**it -.n-

investment fund which ac"uiregoods for the purpose of resale or

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put up the capital in good+s terminalcontract.

Hege -.n -is a pooledinvestment vehicle administered bya professional management firm$ and

often structured as a limited partnership$ limited liabilitycompany$ or similar vehicle.

Mrtgage -.ns- model isto aggregate investor capital$underwrite$ originate and administer a pool of mortgages$ and pay theinterest out to investors net of feescollected by the managers.

Art treas.res -.n-investing in hand-made painting$

commemorative postage stamp$engraving$ ancient boo#s$ uni"uemusical instruments etc.Venture capital fund- An investmentfund that manages money frominvestors see#ing private e"uitysta#es in startup and small- andmedium-siCe enterprises with stronggrowth potential. )hese investmentsare generally characteriCed as high-ris#@high-return opportunities.

RE!T - A real estateinvestment trust 7REI)9- is acompany that owns$ and in mostcases$ operates income-producingreal estate. REI)s own many typesof commercial real estate$ rangingfrom office and apartment buildingsto warehouses$ hospitals$ shoppingcenters$ hotels and even timberlands

Pri'ate e.it -.n- A

private e"uity fund is a collectiveinvestment scheme used for ma#inginvestments in various e"uity 7and toa lesser e6tent debt9 securitiesaccording to one of the investmentstrategies associated with privatee"uity.

Rent -.n- mutual fundwhich underlying asset generates aconstant cash flow.

reit -.n- current tool for

organiCing business credit$ whichwill not be burdened by the 8R

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regulations$ ta6es$ and willeffectively replace the role of ban#sin the already e6isting economicschemes< leasing$ car loans$ andcollection business

In 1! first assetsmanagement companies li#e2ioglobal Asset =anagement $ A48apital$ 2allada asset management$berban# Asset =anagement weresub(ects to licensing.

,hat is more in 1! thefollowing first mutual funds wereestablished<

1. 2allada bondsfunds

%. 2allada stoc# funds

'. berban# Ilya =uromets ond 3und

,e have chosen data fromthe >eague of =anagement8ompanies of Russia from %&&& to%&10. )he source the >eague of =anagement 8ompanies of Russiacontains the detailed informationabout investment funds and assetmanagement companies in Russiasince 1!. Also we found out theoperational information aboutshares+ prices and net asset value of Russian investment funds. )hewebsie is www.nlu.ru.

2lease$ have a loo# at thegrowth dynamics of assetsmanagement companies+ "uantity in

Russian 3ederation figure %. In thegraph you will find the informationabput asset management companiesfrom 1! till our days.

)he total amount of assetmanagement companies 7A=89 is

blue line$ A=8 which haveinvestment funds is red one$ and thelast green line is A=8 which havenot investment funds.

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0

100

200

300

400

500

600

F53e 2.5?n= 9 >e3?n ?;;e;


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neither pension funds+ management.2artly it is connected with

population awareness and profitimprovement in Russia.

8onsider the figure '$ here is

represented the time history offund+s "uantity according to theirscategory$ as< open-end fund$ intervalfund$ closed-end fund from 1!-%&10.Lou can see in the graph 'lines. lue- open-end fund$ red-interval fund$ green-closed-end fund.

#

1##

2##

3##

4##

!##

$##

%##

#

'##

1###

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structure of 3ederal 8ommission for the ecurities =ar#et in Russia. )hefirst closed-end fund was FtrategicInvestmentF headed by assetmanagement company

F=anagement-8enter+,e can see on the figure '

the fast growth of fund+s "uantityfrom %&&B to %&&/$ notably threefoldincrease. )hen we see the growthtendency is reducing because of *lobal economic crisis and the"uantity of interval funds from %&&/#eep decreasing. It is worth sayingthat only closed-end funds continuetheir stable growth.

At the end of =ay %&10 there were1'D investment funds in Russia.

• 4pen-end fund-0%D

• 8losed-end fund-%1

• Interval fund-0

E6amine the percentage ofdifferent categories of open-endfunds at the end of =ay %&10$ figure0<

40&

19&

22&

2&

7&

10&

S*+ ,/0 B/ ,/0 B/ ,/0 M 56+ ,/0 I/

F/0 , ,/0

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F53e 4. Pe36en?e 9 O>en,endF5nd; n 2%14 4

Among the open end fundsin the figure 0$ the toc# 3unds havethe highest percentage 0&$ thenlend and ond 3unds with %% and1 respectively.

As for interval funds$ whichyou can see in the figure B$ the first

place get the toc# fund with 'Dso the lend funds have less for 0comparatively with toc# 3und.)hen follow 8ommodity and Oedge3unds and 3unds of 3und complete

the circle with %

37&

33&

2&

16&

12&

'toc( fuds )od fuds )%ed fuds

*oe+ mar(et fuds ,de- fuds uds of fu

ommodit+ fuds ed!e fuds

F53e /.Pe36en?e 9 Ine3:?8 F5nd; n 2%14/

Oere you can see the 8losed-endfunds$ notably the figure !.

4 Data adapted from the source

www.%u.ru


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As you can see in the figure!$ more than a half of fund+s"uantity is real-estate or REI)7!19. Real-state fund can becreated from ' to 1B years 7li#e all

real estate funds9 with the possibilityof prolongation.

)he REI) can be formedwith the help of the followingmeans<

• cash assets- shareholder

invest their money in a real-estate fund

• real-estate-shareholder invest

their money in items of immovable property

• different assets-shareholders

invest in cash$ items of immovable property$securities

)hen in the figure ! thereare< 2rivate e"uity 3unds$ Rentfunds$ 8redit funds and Venturecapital funds$ they are on their

decrease from to ! .

3& 3&2&

6&

61&

9&

8&

7&S*+ ,/0 B/ ,/0 B/ ,/0

M 56+ ,/0 I/7 ,/0 F/0 , ,/

C/8 ,/0 H/9 ,/0 M6959 ,

A6 65060 ,/0 V6 *5:85 ,/0 REIT

P68;5


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F53e 0.Pe36en?e 9 C8;ed,endF5nd; n 2%14 0

=ore detailed "uantityinformation you can see in the table1$ where you can see the funds+category and also information aboutfunds+ "uantity with reference todifferent types of funds. ?ot allcategories are presented in each typeof fund.

C?e3=O>en,end

95nd;Ine3:?8 95nd;

C89

S*+ ,/0 1%2 1&

B/ ,/0 %' #

B/ ,/0 '4 1$

M 56+ ,/0 ' #I/7 ,/0 3# #

F/0 , ,/0 43 1

C/8 ,/0 &

H/9 ,/0 $

M6959 ,/0

A6 65060 ,/0

V6 *5:85 ,/0

REIT

P68;5


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0

100000000000

200000000000

300000000000

400000000000

500000000000

600000000000

I6;5 F/0 O:-/ F/0 C0-/ F/0

F53e 7. C?3;n 9 5?n= NAV.7

,e want to present8omparison of Puantity to ?AV

figure D.In the D figure we canobserve ' types of funds and thefunds+ dynamic<

Interval funds-red colour 4pen-end fund-blue colour 8lose-end fund-green colour In the conte6t of mutual

funds$ while all investmentcompanies pool the assets of individual investors$ they also need

to divide claims to those assetsamong those investors. Investors buyshares in investment companies$ andownership is proportional to thenumber of shares purchased. )hevalue of each share is called the netasset value$ or ?AV. ?et asset valuee"uals assets minus liabilitiese6pressed on a per-share basis. )heformula of ?AV< =ar#et value of


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assets liabilities@sharesoutstanding.

All mutual fundsK buy andsell orders are processed at the ?AVof the trade date. Oowever$ investors

must wait until the following day toget the trade price.

=utual funds pay outvirtually all of their income andcapital gains. As a result$ changes in

?AV are not the best gauge of mutual fund performance$ which is

best measured by annual total return.)he best performance we can

see in the figure D in %&&D$ ?AV wasD!!$B billion of rubles.

At the same time in %&&/ weobserve the sharp decrease lin#ed tofinancial crisis and ?AV is B0&

billion of rubles.In %&& we see the

continuing funds+ decreasing andonly in the beginning of %&1' we seethe same rate that was in %&&/. Aswe have mentioned earlier in thefigure 1$ that was connected with theRussian economic state at that

period of time. According to present data

?AV of 4pen-end 3und is D billionof rubles$ Interval+s ?AV is !$B

billion of rubles and close-endfunds+ ?AV is 0D1 billion of rubles.

,e did not include 8reditfunds$ 2rivate e"uity funds$ Venturecapital funds$ Oedge funds becauseaccording to Russian legislation it is

forbidden the disclosure of information of these funds. )hesefunds can use only by "ualifiedinvestor.

Oave a loo# on the analysisaccording ?AV+s different funds+categories. ,e are going to preset 'figures according to ?AV indifferent types of investment funds.

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0&

10&

20&

30&

40&

50&

60&

70&

80&

90&

100&

17230131239159

79

48842488888

94

78598444319

245142927630

2473557022435392476544

F/0 , ,/0 I/7 ,/0 M 56+ ,/0

B/ ,/0 S*+ ,/0

5?n= NAV

F53e ".C?3;n 9 5?n= NAV. O>en,end F5nd;"

According to the figure / wecan observe the following<

4n the left side there are

funds "uantities$ whereas on theright side there are ?AV funds+"uantities. All ! funds have their own colours<3unds of funds-orange colour Inde6 funds-light blue colour =oney mar#et fund-purple colour lend funds-green colour ind funds-red color toc# fund-blur colour

o$ for open-end funds we

see that the largest ?AV representond funds 0/$/ billion for Dfunds and toc# funds '&$1 billionfor 1D% funds. lend funds in open-end have D$/ billion of ruble of 0funds of ?AV but it is worth sayingthat in interval funds the lend3unds have ' billion of 1! funds.


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0&

10&

20&

30&

40&

50&

60&

70&

80&

90&

100&

18 2667305708

163001589333

1

47901648

895343960

C/8 ,/0 F/0 , ,/0 B/ ,/0 S

5?n= NAV

F53e #.C?3;n 9 5?n= NAV. Ine3:?8 F5nd; #

Also ta#ing into account the

interval funds$ as we can see in thefigure . )here are 0 types of funds<8ommodity funds-purple colour 3unds of funds-green colour lend funds-red colour toc# funds-blue colour

3unds+ and ?AV+s"uantities.

)he toc# 3unds with %$! billion of ?AV for 1/ funds$8ommodity funds have %$! billion of ruble for their / funds.


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38/92

0&

10&

20&

30&

40&

50&

60&

70&

80&

90&

100&

294174220117330

73080934079

5

1872145712

559

164895568169

78

189234748577

R ,/0 REIT A6 65060 ,/0 M

M 56+ ,/0 B/ ,/0 S*+ ,/0

5?n= NAV

F53e 1%.C?3;n 9 5?n= NAV. C8;ed,end F5nd; 1%

In the figure 1&$ there are Dfunds designated with different

colours and also information li#e inthe previous figures about funds+"uantity and ?AV.

)he highest ?AV belong toRent funds 1/ billion for D/ fundsin close-end funds 7figure 1&9 .Andreal-estate investment trust 7REI)9has the smallest ?AV for big number of funds. 1!0 billion for BB funds.

4.2 In3d56n 9ex6@?ne 3?ded95nd; (ETF) n R5;;?

,e have e6amined ' types of investment finds in Russia$ notablyfrom 1! till our days. ,e alsowant to say that Russian mar#et is in

progress as we have mentionedabove. And now in Russia we cansee more and more funds. It is worth

10 Data adapted from the

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saying that until "uite recently thee6change traded funds - E)3 werenot available in Russia. 3irst E)3appeared on =oscow E6change inApril %&1'.

E)3 is an acronym for E6change-)raded 3unds$ investmentvehicles traded in stoc# e6changes inthe manner similar to stoc#s. )hefunds are made up a similarlythemed stoc#s and bonds. )hey aretraded at the net asset value of itsunderlying assets. ,hile they havemany stoc#-li#e features$ they arecheaper and more ta6-efficient thanstoc#s.

E)3+s funds<

1. 3inE6 )radable Russian8orporate onds H8I)E)3 7RH9 -3XR

%. 3inE6 )radable Russian8orporate onds H8I)E)3 7H9-3XRH

'. 3inE6 2hysically Oeld *oldE)3 7H9-3X*

0. 3inE6 =8I *ermany

H8I) E)3 7EHR9-3XEB. 3inE6 =8I HA

Information )echnologyH8I) E)3 7H9-3XI)

!. 3inE6 =8I 5apan H8I)E)3 7H9-3X52

D. 3inE6 =8I AustraliaH8I) E)3 7H9-3XAH

/. 3inE6 =8I HA H8I)E)3 7H9-3XH

. 3inE6 =8I Hnitedingdom H8I) E)37*29-3XH

1&. 3inE6 =8I 8hina H8I)E)3 7H9-3X8?

11. 3inE6 8AOEPHIVA>E?) H8I)E)3 7RH Oedged hares9-3X==

)al#ing about 3inE6 we can that thatit is the first ever locally listede6change-traded fund 7E)39 on=oscow E6change

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asic Information<

• Asset class- 3i6ed Income

• 2roduct type-Retail Q

Institutional

• Inception date-&D@&B@%&10

• 3und base currency-H

• Reporting fre"uency-

=onthly

• Oedged currency-RH

• =inimum purchase-1 share

• 3und domicile-Ireland

Ris# Information

• Annual volatility-&.'

• )rac#ing error-&.0

3inE6 has launched Russia+sfirst ever locally listed e6change-traded fund 7E)39$ the 3inE6)radable Russian 8orporate ondsH8I) E)3 73XR9. )he fund has

been listed on the =oscowE6change in April %&1' and

provides e6posure to shorter maturity li"uid Eurobonds issued byRussian non-sovereign issuers.uying and selling 3inE6 E)3s is

very simple. )hey trade and settle (ust li#e ordinary shares throughoutthe trading day. 3inE6 E)3s arecurrently listed on the Irish toc# E6change 7IE9 and admitted totrading on the >ondon toc# E6change 7>E9 7settling through8rest and Euroclear9$ and =oscowE6change 7settling through ?9.

)he fund is lin#ed to thearclays E= )radable Russian

8orporate ond Inde6. ecuritiesissued by domestic Russian "uasi-sovereign and corporates are eligiblefor the inde6$ with a ma6imum of three bonds per issuer. Issuer capsand floors are applied to enhancediversification. uration of the

bonds ranges from 1/ months to fiveyears

Ale6ander Afanasiev$8hairman of the E6ecutive oard

and 8E4$ =oscow E6change$ said<:)he entrance of the first E)3 on to

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the =oscow E6change signals animportant step in the development of financial infrastructure in Russia.)he launch of this type of global

product contributes to the

establishment of =oscow as aninternational financial centre.;RussiaKs stoc# mar#ets may soon seea revaluation upward. Russia mayhave been changing for the better$ atleast economically. )his loo#s set tochange$ with significant growthe6pected in emerging mar#ets suchas Russia.

)he world mar#et of E)3e6pects the growth in the nearest

future. According to Europeaninvestors+ investigations$ B& of respondents consider that financialreforms in Russia and situation+simprovement will cause beneficialeffect on the Russian economy.

Oere you can see theadditional fund+s information<

?AV-7on %&10-&!-1%9 -/&.!0DAssets 7=9- 7on %&10-&!-1%9-1/.1//hares out 7=9- &.%&=ar#et 8ap 7=9 -%&1.1B 2remium-1.BBAverage B%-,ee# 2remium-1.&''%ividends for 3XRividend )ype- Incomeividend 3re"uency-emi-An >ast ividend ?et-7on %&10-&'-'19B&.D1&

ividend Lield 7ttm9- 1&.14n the 3igure 11 you cansee the performance for 3inE6$)radable Russian 8orporate ondsH8I) E)3 7RH9 3XR for 1year you can see the graph whichrepresents the changing of E)3 pricefor 1 year.

41


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F53e 11. Pe393


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Russian government has been eager to benefit from the countryKs mineraland fossil fuel deposits.

)he Russian governmentalefforts have proven to be remar#ably

successful$ stimulating Russianeconomy and inspiring significantdevelopment$ particularly in ma(or cities. Even today$ Russia remainsone of the worldKs largest oilsuppliers$ and mining continues togenerate significant profits.

=uch of RussiaKs Asianterritories still have not beenade"uately e6plored$ but geologicalstudies suggest that there are many

untapped oil and mineral depositswaiting to be unearthed whichensures that Russian E)3s willremain profitable in the near future.imilarly$ the Russiantelecommunication industry has seena robust growth.

Although mobile phonetechnology entered the country inthe 1&s$ it was not until %&&&s thatit became widespread. 3oreign anddomestic cell phone networ#scontinue to grow and thrive. o far$much of that growth has beenconfined to ma(or cities and their immediate suburbs$ but the enormityof Russia ensures that there is still be

plenty of room to grow for manydecades.

5ust li#e any other investment$ Russian E)3s carry

many ris#s as well. In spite of aseries of recent government reforms$the nation is still suffering from

pervasive corruption. Independentresearchers estimate that RussiancitiCens and corporate entities spendmillions on bribes every year. )hecorruption continues to affectRussiaKs (ustice system and lawenforcement in general. It ma#es itharder for investors to protect

themselves from fraud$ andcompanies those stoc#s ma#e up the

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E)3s are more vulnerable to failurethan their ,estern counterparts.

)he governmentKsrelationship with Russiancompanies$ particularly the ones

involved in the energy sector$continue to cause concern. 4ver the

past few years$ the government hasdemonstrated its willingness to ta#eover successful companies. )hecircumstances behind these mergersremain controversial. =any long-time investors in Russian assetscontinue to worry about the long-term viability of their investments.

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are sub(ect to profits ta6ation at arate not e6ceeding percent.

Hnder applicable Russianlegislation$ investment funds maydistribute dividends which are

sub(ect to profits withholding ta6 atthe source of payment at the rate note6ceeding percent with respect torecipients who are Russian residentsand 1B percent with respect torecipients who are foreign residents$i.e. the investment fund shouldwithhold and subse"uently transfer the above ta6 to the budget.

ividends are distributedfrom the retained earnings of the

investment fund$ for e6ample. )heyare non-deductible for profits ta6

purposes.)here are no special ta6

incentives for investment funds inthe Russian 3ederation.

5oint stoc# funds are sub(ectto property ta6 at the rate note6ceeding %.% percent.

In general$ transactions withsecurities$ including investmentunits$ are not sub(ect to value-addedta6 7VA)9. Oowever$ the amounts of fees paid to a management company$specialiCed custodian$ and auditor are sub(ect to VA) in accordancewith the general rules.

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/ THEORETICAL'AC+$ROUND

/.1 T@e E996en


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)his is called wea# form of mar#etefficiency. If a mar#et meets thewea# form criteria$ it is not possibleto ma#e superior profits by studyingthe past returns. =oreover$

according to the wea# form criteriait should not be possible to use e.g.historical fund returns to predict thefund performance in the future andma#e superior profits.

)he second form of efficiency states that security pricesreflect both the past information andall the other published information.)his form is better #nown as thesemi-strong form of mar#et

efficiency. If mar#ets meet the semistrong criteria$ then the prices willimmediately ad(ust for publicannouncements such as theannouncement of the last "uarter+searnings.

3inally$ the third form of mar#et efficiency is called strongform efficiency. )his means that the

prices reflect both public and privateinformation of the certain security.)herefore$ not even insider information could be used to gainsuperior profits.

/.2 T@e C?>?8 A;;eP36n Mde8

)he 8apital Asset 2ricing =odel78A2=9$ which is the standard formof the general relationship for asset

return and ris# was developedindependently by harpe 71!09$>intner 71!B9 and =ossin 71!!9.All three authors ma#e a similar conclusion about the e"uilibriummodel that determines therelationship between the e6pectedreturn and ris# for any asset. )he

basic idea behind the 8A2= is thatthe e6pected returns on securities area positive linear function of their

mar#et ris#. )he model can be givenas follows<

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E (ri )=rf + β i [ E (rm )−rf ]where E7ri9is the e6pected

return for asset i$ rf is the return of the ris#-free asset$ i stands for the

beta coefficient for security i and

E7rm9 is the e6pected return for themar#et portfolio.

)he ris#-free asset isconsidered as a certain return.)herefore$ this type of asset must besome #ind of fi6ed income securitywith no possibility of default.*enerally accepted pro6y for theris#-free asset is )reasury securitywith a maturity that matches thelength of the investor+s holding

period. harpe 719)he beta coefficient

measures the security+s sensitivenessto the changes in return of themar#et portfolio. It assumes that anyadditional variables such as priceratio or the firm siCe do not have aneffect on e6pected e6cess return.

)herefore$ it is the inde6 of systematic ris#. )he higher the beta

is for any security$ the higher thee"uilibrium returns is e6pected to be. 4n the other hand$ higher betacoefficient would mean higher losses when the mar#et is goingdown. )he beta coefficient can becalculated as follows .Elton 7%&&'9

β i=cov (ri,rm)var(rm)

where cov 7ri$rm9 is thecovariance of mar#et return and

return on investment and var 7rm9 isthe variance of mar#et return.

,hen it comes to the mar#et portfolio$ harpe 719 suggest thatit does not only consists of commonstoc#s but also of other #ind of investments such as real estate$

bonds and preferred stoc#s.Oowever$ generally investors restrictthe mar#et portfolio to (ust commonstoc#s.

Actually$ the definition of thetrue mar#et portfolio has been a

48


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controversial topic among academicsfor years. 3or e6ample$ Roll 71DD9argues that the true mar#et portfoliois difficult to determine. Accordingto him$ this means that therefore it is

not possible to test the 8apital Asset2ricing

=odel. 3urthermore$ Roll71DD9 claims that the employmentof different pro6ies for the mar#et

portfolio may cause somemeasurement errors. 3or e6ample$different pro6ies$ even if their returns are highly correlated$ maylead to different beta estimates for the same security. )he 8apital Asset

2ricing =odel has also beencriticiCed that it reduces the situationto very e6treme case. Even if themodel e6plains the behavior of security returns$ it does notnecessarily e6plain the behavior of individual investors. 3or e6ample$investors may analyCe and processthe information in a different wayand therefore they might havedifferent e6pectations aboutsecurities future performance. Elton7%&&'9

Oowever$ despite thecriticism directed to the 8A2= it iswidely used in finance. 4bviously$ itdescribes the reality in a "uitereliable way. Another reason for itsemployment is its mathematicalsimplicity. )herefore$ the 8A2= isgenerally used e.g. in pro(ect and

portfolio evaluations$ in a firm+scapital budgeting$ portfolioconstruction and even measuring theeffect of policy change on ris#. 8hen7%&&'9

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/.2.1 T@e en;en A8>@?

ased highly on the 8apital Asset2ricing =odel$ 5ensen 71!/9derives a measure for portfolio

performance called 5ensen alpha. Itmeasures the average return on the

portfolio over and above that predicted by 8A2=.

)he 5ensen alpha can begiven as follows<

rp−rf =αp+ βp(rm−rf )where rp return for portfolio

p$ Sp is the 5ensen Alpha of portfolio p$ rf is return of the ris#-free asset$rm is the return for the mar#et

portfolio and p is the betacoefficient for portfolio p.

)he 5ensen alpha can beinterpreted so that if the Sp is

positive the portfolio has performed better than the 8A2= has predicted.=oreover$ the higher the alpha the

better performance the portfolio hasobtained. 4n the other hand if the Spis below Cero it indicates that the

portfolio has underperformedcompared with predicted by the8apital Asset 2ricing =odel. 5ensen71!9 suggests that the alphameasures the forecasting ability of afund manager. )herefore$ if themanager has the ability to forecastsecurity prices 7or perhaps some

insider information not available toothers9 it should lead to a positiveabnormal return compared with8A2=. )o clarify this more$ the5ensen alpha can also be graphicallydescribed. It can be demonstrated asthe vertical distance of theinvestment+s characteristic line fromthe origin where mar#et e6cessreturn is presented on the horiContala6is and e6cess return on investment

is on vertical a6is.

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3igure 1& gives an e6ampleof three portfolio+s characteristiclines. 8learly$ each portfolio has ane"ual beta coefficient. 4n the other hand$ their intercepts differ.

2ortfolio has an intercept of Cero$ but the intercepts of the portfolios Aand 8 are different from Cero. )hismeans that these portfolios haveearned abnormal return differentfrom what was predicted by 8A2=.4bviously$ the portfolio A has a

positive abnormal return when theabnormal return on the portfolio 8 isnegative.

F53e 1%. T@e en;en A8>@? n @e 3-3?6e

3igure 1& displays theinterpretation of the 5ensen Alpha.4n the horiContal a6is is presentedthe mar#et return 7rmt9 and on thevertical a6is is presented the returnon the investment 7rit9. A$ and 8describe different portfolios.

If Sp and p are assumed to be constant over the evaluation period$ they can easily be estimatedusing the simple linear regression.)herefore$ this e"uation can be

presented as follows .harpe 719<rmt −¿

rpt −rft =αp+ β¿rft9T

εpt

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where rpt is return for portfolio pat time t$ Sp is the 5ensenAlpha of portfolio p$ rft means thereturn of the ris#-free asset at time t$rmt is the return for the mar#et

portfolio at time t$ p is the betacoefficient for portfolio p and Upt isthe error term of portfolio pat time t.

/.2.2 T@e F?


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e6tend and develop their previousstudy.

)hey e.g. use time-seriesregressions to study asset pricingand form portfolios to mimic the ris#

factors related to siCe and boo#-to-mar#et e"uity. ased on the resultsthey conclude that three factors arefor the most part able to capturestrong variation in returns$ no matter what other factors are used in thesame regression1%

)hese factors are<1. )he e6cess return on a

mar#et portfolio. 7rm-rf9%. )he difference between

the return on a small stoc# portfolioand the return on a large stoc#

portfolio. 7=9'. )he difference between

the return on a high boo#-to-mar#etstoc# portfolio and the return on alow boo#-to-mar#et portfolio.7O=>9

3inally$ generaliCed in thee"uation form the three-factor modelsuggested by 3ama and 3rench71'9$ which e6pands the 8apitalAsset 2ricing model$ can be given asfollows<

E (ri ) – r f =b i [ E (rm )−rf ]+si E (SMB )+hiE ( HML)

where E7rm9-rf $ E7=9and E7O=>9denote the e6pected

premiums for each factor described before. )he bi$ si and hi in thee"uation B measure the sensitivity of

each factor 7i.e. factor beta or factor loading9 in the e6pected return andthey can be estimated through timeseries regression as follows<ri−r f =α i+ β i ( rm−r f )+siSMB+hi HML+εi

12 s e.!. ri!et 2007 150

poits out it is worthwhi%e to

ote that the amarech

mode% assumes that the mar(et

is e;ciet $ut more tha oe

factor is eeded to e-p%ai

asset returs.53


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4n the other hand$ theintercept of the previous regressioni.e. Si can be also interpreted as a

performance measure. Oowever$following this approach$ it is

possible to capture e6cess returnsgenerated by tactical asset allocationstrategies that try to e6ploitinconsistencies of the 8apital Asset2ricing =odel.

)o be more specific$ funde6cess returns are decomposed intothree componentsJ e6cess mar#etreturns$ returns generated based onwell #nown strategies of buyingsmall-cap stoc#s and selling large-

cap stoc#s 7=9$ and finallyreturns generated by buying stoc#swith high boo#-to-mar#et ratios andselling stoc#s with low boo#-tomar#et ratios 7O=>9.

)herefore$ the intercept theformula represents the value that themanager has added to the portfolioover and above what could be

(ustified by mar#et ris# andgenerated by these #nown strategies.

Oence$ at least in theory$statistically significant positive alphawould implicate some managerials#ill. abalos 7 %&&D9

/. T@e S@?3>e 3?

)he harpe Ratio developed by,illiam harpe 71!!9 is one of the

most commonly used performancemeasures due to its simplicity1'. )heratio is calculated by dividing thee6cess return on the portfolio by thestandard deviation of the return.10

)herefore$ it ta#es a differentapproach to performance

13 , additio to discussio of

the ratio 'harpe 1994

pro


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measurement than the two previousmodels. =athematically the harperatio can be given as follows<

S=rp−rf

σ p

where rp is the return for the portfolio p$ rf is the return of theris#-free asset and p describes thestandard deviation of the returns of

portfolio p. Respectively$ thestandard deviation p of the

portfolio p needed in the previousformula can be given as follows<

¿ ❑n−1

where r it is the return of

portfolio pat time t$ pr is the meanreturn of portfolio p and n is the totalnumber of observations.

Investors can interpret theharpe ratio to denote$ how muche6cess return they are receiving for the e6tra volatility they ta#e for holding a ris#ier asset. )o be morespecific$ the harpe ratio showsinvestors$ if the return on portfolio isdue to smart investment decisions or

due to e6tra ris#.According to harpe 71!!9$

fund performance might vary in tworespects. 3irstly$ funds might e6hibitdifferent variability in returns due toselection of different degrees of ris# or due to erroneous prediction of theris# related to particular portfolio.econdly$ funds with similar ris#smight show variability in returns due

to inability of some managers toselect underpriced securities or todiversify properly their holdings.Oence$ the harpe ratio measuresalso the managerial s#ill.

,hen comparing e.g. twodifferent funds one can be seen as a

14 E-isti! %iterature su!!ests

a%terati


56/92

good investment if these higher returns are not due to too muchadditional ris#. )herefore$ investorsare often advised to pic# portfolioswith high ratios.

,hen using the harpe ratioit is reasonable to note that standarddeviation measures the total ris# of the investment and thereforeincluding also the unsystematic ris#.Oowever$ because the ris# ismeasured this way$ the harpe ratiois independent from the asset pricingmodels such as the 8A2=. It doesnot ta#e into account e.g. thecorrelation structure of the returns

with the investor+s other holdings.4n the other hand$ Elton

7%&&'9 proposes that the harpe ratioloo#s the investment decision fromthe investor+s point of view.)herefore$ it assumes investors tochoose mutual funds to representma(ority of their investments. If it isso$ investors are only concernedwith the full ris# of the fund and thestandard deviation is a reasonablemeasure for that ris#. Oence$ theemployment of the standarddeviation as a ris# component ma#esthe harpe ratio most useful insituations where the investor hasonly one ris#y investment. Elton7 %&&'9

In practice$ there may besituations when funds haveunderperformed the ris#-free interest

rate on average and hence havenegative e6cess returns. )o be morespecific$ when sorting funds basedon the harpe ratio in descendingorder the funds will be orderedcorrectly if the e6cess return is

positive. 4n the other hand$ if thereturn is negative sorting funds indescending order will lead tounreliable ran#ings. 3or e6ample$ ina case of two funds with e"ual

positive e6cess return$ the one with

56


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the lower standard deviation willreceive the highest score.

Oowever$ if the averagee6cess returns are e"ual butnegative$ the fund with the higher

standard deviation receives thehighest harpe ratio score 7lessnegative9. )herefore$ comparing theharpe ratios e.g. when analyCingdifferent funds can cause problems.

/.4 T3e=n3 3?

)he )reynor ratio 7sometimes calledthe reward-to-volatility ratio or )reynor measure9$ named after 5ac#

>. )reynor is a measurement of thereturns earned in e6cess of thatwhich could have been earned on aninvestment that has no diversifiableris# 7e.g.$ )reasury ills or acompletely diversified portfolio9$ per each unit of mar#et ris# assumed.

)he )reynor ratio relatese6cess return over the ris#-free rateto the additional ris# ta#enJ however$systematic ris# is used instead of total ris#.

)he higher the )reynor ratio$the better the performance of the

portfolio under analysis.

) ¿r i−rf Bi

where<)- )reynor ratio$ Ri- portfolio

iKs return$ Rf- ris# free rate$ i- portfolio iKs beta.

>imitations<>i#e the harpe ratio$ the

)reynor ratio does not "uantify thevalue added$ if any$ of active

portfolio management. It is aran#ing criterion only. A ran#ing of

portfolios based on the )reynor Ratio is only useful if the portfoliosunder consideration are sub-

portfolios of a broader$ fullydiversified portfolio.

If this is not the case$ portfolios with identical systematic

57


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ris#$ but different total ris#$ will berated the same. ut the portfoliowith a higher total ris# is lessdiversified and therefore has ahigher unsystematic ris# which is

not priced in the mar#et.An alternative method of

ran#ing portfolio management is5ensenKs alpha$ which "uantifies theadded return as the e6cess returnabove the security mar#et line in thecapital asset pricing model. As thesetwo methods both determineran#ings based on systematic ris# alone$ they will ran# portfoliosidentically.

/./ Ex>e6ed Re53n

)he e6pected return from investingin a security over some futureholding period is an estimate of thefuture outcome of this security.

Although the E6pectedReturn is an estimate of aninvestor+s e6pectations of the future$it can be estimated using either e6ante 7forward loo#ing9 or e6 post7historical9 data.

If the e6pected return ise"ual to or greater than the re"uiredreturn$ purchase the security.

Regardless of how theindividual returns are calculated$ theE6pected Return of a 2ortfolio is theweighted sum of the individualreturns from the securities ma#ing

up the portfolio<

∑=

= N

n

nn P R E w R E

1

9797

E6 ante e6pected returncalculations are based on

probabilities of the future states of nature and the e6pected return ineach state of nature. um over allstates of nature$ the product of the

probability of a state of nature andthe return pro(ected in that state.

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59/92

E6 post e6pected returncalculations are based on historicaldata. Add the historical returns andthen divide by the number of observations.

/.0 V?3?n6e ?nd S?nd?3dDe:?n

Variance is a measure of thedispersion in outcomes around thee6pected value. It is used as anindication of the ris# inherent in thesecurity. tandard deviation is thes"uare root of variance.

E6 ante variance calculation<)he e6pected return is

subtracted from the return withineach state of natureJ this differenceis then s"uared.

Each s"uared difference ismultiplied by the probability of thestate of nature.

)hese weighted s"uaredterms are then summed together

∑=

−=S

s

s s P R E R

1

%% 9W7Xσ

E6 post variance calculation<)he average return is

subtracted from each single periodreturnJ this difference is thens"uared.

)he s"uared differences aresummed.

)his sum is divided by thenumber of periods 7using populationdata9 or the number of periods minus1 7using sample data9.

2opulation data

979977 %

1

%T R E R

T

t

t ÷

−= ∑

=

σ

ample data

9179977 %

1

% −÷

−= ∑

=

T R E R

T

t

t σ

/.7 'e?

59


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eta is a measure of volatility$ or relative systematic ris#$ for singleassets or portfolios.

M

i M i

M

M i

i

σ

σ ρ

σ

σ β ==

%

Oistorical beta is usuallyestimated by regressing the e6cessasset returns for the company or

portfolio 7y-variable< Ri - Rf9 againstthe e6cess mar#et returns 76-variable< Rm - Rf9 i.e.$ through theuse of a characteristic line. )he betaof a portfolio is<

∑= ii Port w β β .

/." P398


61/92

the inde6.1B )herefore$ the manager has to decide if it is necessary to buysome stoc#s with smallest mar#etweight or e6clude them in order tolower the transaction costs. Elton

7%&&'9Elton suggests a couple of

approaches to construct an inde6fund. Each of these approachesma#es a distinction betweenaccuracy in replicating the inde6 andtransaction costs. )hese threeapproaches are as follows<

1. Oolding each stoc# in the proportion that it represents of theinde6.

%. =athematically forming a portfolio with specified number of stoc#s 7e.g. '&&9$ which best trac#sthe inde6 historically.

'. 3inding a smaller set of stoc#s that matches the inde6 in the

percent invested in a specified set of characteristics 7e.g. same percent inindustrial$ utility and financialstoc#s9. 8ommonly usedcharacteristics have been sector$industry$ "uality and siCe of capitaliCation.

=oreover$ also combinationsof all three approaches can be usedto construct an inde6 fund. Activemanagement instead$ ta#es adifferent position from the passivemanagement.

Active portfolio managers donot follow the efficient mar#et

hypothesis. )hey believe that it is possible to profit from the stoc# mar#ets through various strategiesthat aim to identify mispricedsecurities.

)herefore$ activemanagement is based strongly on aforecast about the future. E6istingliterature has normally classifiedactive management styles into three

15 =his trade o> is ofte ca%%ed

trac(i! error.61


62/92

classesJ mar#et timers$ sector selectors and security selectors.

=ar#et timers change the beta of the portfolio according totheir forecasts on the mar#et. If an

active manager assumes the bullmar#et$ he will increase the beta of the portfolio and when the bear mar#et is assumed then the manager will lower the beta of the portfolio$respectively1!

3or e6ample$ the portfoliocomposition toward higher beta can

be implemented as follows< yincreasing the ratio of stoc#s to other assets 7for e6ample bonds9

y investing in stoc# whosemar#et ris# 7beta9 is greater compared with the stoc# that was

previously included in the portfolio.)he beta of the portfolio can

be raised by investing in offensivederivatives e.g. buying forwardcontracts or options.

,hen the bull mar#et isassumed the implementation is donethe other way around. Another activemanagement style is securityselection. )his means searching for undervalued securities.

=anagers who are practicingsecurity selection are ma#ing betsthat the mar#et weights on securitiesare not the optimum amount to holdin each security. )herefore$managers increase the weight of undervalued stoc#s 7i.e. ma#e a

positive bet9 and decrease the weightof overvalued stoc#.A third fre"uently used

method in active portfoliomanagement is sector or industryselection. )his is similar to security

16 =he term ?$u%% mar(et@ is

ofte used to descri$e a stoc(

mar(et that is risi! or is

e-pected to rise. especti


63/92

selection with the e6ception that theunit of interest is a certain sector or an industry. ased on the analysis$ a

positive or negative bet will be madeon a sector. =anagers who practice

sector selection will rotate their portfolios+ overweighting andunderweighting sectors over time astheir forecasts change. Elton 7%&&'9.Oowever$ despite the variousstrategies discussed above especiallymanagers managing the emergingmar#et funds may face some

problems when trying to implementthese strategies.

3or e6ample$ transaction

costs may be higher in the emergingmar#ets. =oreover$ some trading

barriers may e6ist. )herefore$ these problems may prevent fundmanagers from followings somecertain investment strategies.

63


64/92

0 PRACTICAL 'AC+$ROUND

0.1 Fndn 5 @e e;n:e;


65/92

,e decided to choose thetraditional performance measuresfrom si6ties<

harpe Ratio 71!!9)reynor Inde6 71!19

5ensen+s Alpha 71!&9harpe Y 7return ris#-free

return9 @ 7std. dev. of portfolio9 )hisis a measure of total ris# ad(usted

performanceharpe rule- 8hoose position

with higher harpe ratio$ whereharpe ratio is ratio of ris# premiumto position over measure of ris# e6pressed as standard deviation of returns of a specific position

)reynor Y 7return ris#-freereturn9 @ beta )his is a measure of systematic ris#-ad(usted

performance where the systematicris# is the mar#et ris# 7non-systematic ris# is event ris# thatcannot be diversified away9

)reynor rule- 8hoose position with higher )reynor ratio$where )reynor ratio is ratio of ris#

premium to position over measure of ris# e6pressed as beta of a specific

position. Assumes completelydiversified portfolio

5ensen+s Alpha Y 7Return of security ris# free return9 - Zbeta [7return on mar#et ris#-free return9\

?otice that if 8A2= is correct thefirst term on the right hand sidee"uals the second term on the righthand side and 5ensen+s Alpha Y &. A

positive value for 5ensen+s alphaimplies the portfolio has value ine6cess of the e6pected return for agiven ris# level whereas negativealpha implies the opposite.5ensen rule- 8hoose position with

positive regression interceptincluded in 8A2= e6pression. )heintercept will be positive when a

portfolio manager achieves better returns than the aggregate mar#et

)o sum up<

65


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harpe measures e6cessreturn over total ris# 7std dev of

portfolio9)reynor measures e6cess

return over mar#et 7beta9

5ensen+s Alpha measurese6cess over 8A2= e6pected return

o$ harpe use )otal Ris#$)reynor Q 5ensen+s use ystematicRis#

3or our purpose$ notablyfinding out the best fund$ we willuse these ' ris#-ad(usted methods.

3or Russian investmentfunds+ analysis we will choose %& of investment funds. ,e use the source

the >eague of =anagement8ompanies of Russia and choose the

biggest funds according to their netasset value 7?AV9.,e are going to use monthly returnsfrom '1 of =ay %&1% to '1 of =ay%&10,e will choose 0 funds from Bdifferent categories as<] open-end stoc#s] open-end bonds] closed-end REI) 7real-estateinvestment trust9] interval stoc#s] interval blend

Oere you can see the table %8hosen funds. In table you can seethe funds+ names$ types andcategories of investment fins$ namesof asset management companies7A=89$ and net asset value 7?AV9

in millions of rubles.

N?eC?e3

=

A;;eM?n?e'

R58,,80 - B/0 O:-/ B/0R58,,80

C5:85> L/. ! !43>!

A,5 C5:85 R06;F/ O:-/ B/0

A,5 C5:85>L/.

2 $&$>3

66


67/92

URALSIB F860 O:-/ E

"SC 4 $#!>4

S?6?5+ @ S*+0D?685 N8+88* O:-/ E'

S?6?5+T**8*5805/ *980 O:-/ E#

S?6?5+ G?5I6 O:-/ E%

URALSIB P60:*8;I;00 I6;5 E"SC

1 #>'

H89 T* I6;5 E L/. 44#>$

I;0?55* I6;5 E L/. 3$&>%

A,5 C5:85 E2

A,5 C5:85 I6;5 B/ A,5 C5:85>

L/. 1 12$>1

O8 F/ , I/0685R*06*8 5/

D;: I6;5 B/ C5:85> L/. '#%>2

E69 I;0 I6;5 B/E69

I;0> L/. 3'!>&

C5:85I;0 - I6;5 I6;5 B/ S659 "SC 11%>!

RVM M95:80 C0-/ REIT

RMC5:85> "SC

12 !1'>4

T650U8 @ E56 C0-/

REIT

T60U8 A00

M559> L/.

% 3$2>$

D; C6 C0-/ REIT

N5;8956>L/.

$ &4&>2

R*06*8 5/D;: C0-/

REIT585

B0800H0> L/.

$ 1&%>&

T?8e 2 C@;en 95nd;

In the beginning we aregoing to get the monthly returns

according to share price and based

on the received data we calculate<

Average return

Volatility 7tandard eviation9

eta

harpe Ratio

)reynor Ratio 5ensen+s Alpha )he data of monthly share price and

67


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return you can find in anne6$ tablesfrom open-end bond fund to closedreal estate funds.As mar#et return we will choose theinde6 =I8EX.

)he =I8EX Inde6 is a

capitaliCation-weighted composite

inde6 calculated based on prices of

the B& most li"uid Russian stoc#s of

the largest and dynamically

developing Russian issuers with

economic activities related to the

main sectors of the Russian

economy presented on the

E6change.

)he =I8EX Inde6 was

launched on eptember %%$ 1D.

)he Inde6 is calculated in real time

and denominated in rubles. )he

=I8EX is one of the % main Russian

inde6. 7the second one is R)9

Lou will find the monthly=I8EX data in anne6 7table 1B

=I8EX9

3or ris# free calculations we

are going to choose Ris# free Russia

1& year bond because investment

companies invest their money for the

long period of time and we must

chose the appropriate ris# free asset

after that we will ma#e funds+

ran#ing according to the received

data. 7ee in anne6 table 1! Ris#-

free Russia 1&-Lear ond9.

,e are going to find out

what #ind of funds outperform or

underperform the benchmar#.

Oere you can see the table '3unds+ e6pected return annual. ,e

68


69/92

use ran#ing from largest to smallest percentage. Also we included mar#etvalue to ma#e it clear which fundsunderperformed or outperformed the

benchmar#.

Indicators of e6pected return

for the whole period of 1' mutual

funds are higher than the value of

e6pected return of the inde6

=I8EX$ notably &$' per month. It

is '$! per annum. )he mutual fund

^elovoy 8entr_ shown us the

highest e6pected return is 0$&/ per

month or 0/$B per annum. )his

e6pected return indicates that from

every invested ruble we supposing to

get 0/$B #opec# 7Russian small

change9

F5nd n?e6ed 3e53n

?nn5?8

D; C6 4&>'!

R*06*8 5/ D;: 24>$#

S?6?5+ G?5 I6 22>1&S?6?5+ T**8*580 5/ *980 1'>%'

S?6?5+ @ S*+0 D?685 N8+88* %>%2

A,5 C5:85 R06; F/ %>43

R58,,80 - B/0 $>3#

S?6?5+ @ B/0 I85 M60 $>1!

R06; $>#&

C5:85I;0 - I6;5 !>'%

H89 T* !>4'

E69 I;0 !>3!

A,5 C5:85 3>''MAR+ET -04G

I;0?55* 3>!%

RVM M95:80 #>%'

O8 F/ , I/0685 R*06*8 5/D;: #>!'

URALSIB F860 #>!'

T650U8 @ E56 #>!!

A,5 C5:85 E3$

URALSIB P60:*8; I;00 -2>!&

T?8e . F5nd; ex>e6ed 3e53n?nn5?8

69


70/92

In the table 0 fund+s volatilityyou may see annual volatility for %&chosen funds and mar#et volatility.)he standard deviation of funds+return in 1' cases out of %& is less

than the base inde6. Inde6 volatilityis e"ual to 0$ per month it is1'$B% per annum. Everythingindicates that investment in mutualfunds is less ris#y than in inde6.4pen-end bonds fund :Reserve; hasthe lowest standard deviation is1$B per annum$ however thee6pected return is !$1% per annum.

F5nd n?3!

S?6?5+ T**8*580 5/ *980 1$>&&

A,5 C5:85 E24

S?6?5+ G?5 I6 1!>41

URALSIB P60:*8; I;00 1!>2#

MAR+ET 1-/2G

R*06*8 5/ D;: 13>22

E69 I;0 1#>3&

H89 T* 1#>21

I;0?55* '>4!

A,5 C5:85 $>''

O8 F/ , I/0685 R*06*8 5/D;: $>44

C5:85I;0 - I6;5 $>#3

RVM M95:80 4>'!

S?6?5+ @ B/0 I85 M60 4>32

R58,,80 - B/0 3>4$

T650U8 @ E56 1>'%

A,5 C5:85 R06; F/ 1>&%R06; 1>!#

T?8e 4. F5nd; :8?8=

In the following table `Byou will see fund+s beta. ,e useran#ing from highest to smallest

beta. )he beta coefficient shows thatmar#et is going to act on changingof portfolio+s return. Assets with the

beta more than 1 are more ris#y than

the mar#et$ and assets with the betaless than 1 are less ris#y. In case of

70


71/92

negative beta the fund+s result will be opposite to mar#et. In our investigation all funds have thecoefficient less than 1 and fundsout of %& have negative beta$ this

points to the fact that all chosenfunds are suitable for ris# averseinvestors.

F5nd n?334

URALSIB P60:*8; I;00 #>244

S?6?5+ @ S*+0 D?685 N8+88* #>212 A,5 C5:85 E13%

E69 I;0 #>122

H89 T* #>#3'

C5:85I;0 - I6;5 #>#1!

I;0?55* #>#12

R58,,80 - B/0 #>##%

A,5 C5:85 #>###

T650U8 @ E56 -#>##'

R06; -#>#11

O8 F/ , I/0685 R*06*8 5/D;: -#>#1!

A,5 C5:85 R06; F/ -#>#23

RVM M95:80 -#>#4#

S?6?5+ @ B/0 I85 M60 -#>#$1

S?6?5+ G?5 I6 -#>114

S?6?5+ T**8*580 5/ *980 -#>1%!

R*06*8 5/ D;: -#>221T?8e /. F5nd; 'e?

,e would li#e to present the

1st traditional performance measure-harpe Ratio$ also #nown as harpInde6$ or Reward-to-Variabilityratio$ is a popular indicator for measuring return-to-ris#. )hiscoefficient shows us what #ind of fund+s return is going to be per unitof ris# with regard to return of ris#-free asset.

)his coefficient is used for comparison of effectiveness result of investment in various investment

71


72/92

funds. )he greater a portfolioKsharpe ratio$ the better its ris#-ad(usted performance has been.2ositive values indicate better

performance compared to ris#-free

investments and negative valuesindicate worse performance.

In the table !$ we can see our calculation results of harpe Ratio of %& Russian funds. It is worth notingthat only ! funds out of %& haveharpe ratio less than the benchmar# that gives us the evidence of higheffectiveness of funds+ management.Alfa 8apital Reserve 3und has thehighest harpe Ratio of %$!'B.

F5nd n?e R?

A,5 C5:85 R06; F/ 2>$3!

R06; 2>3&3

R*06*8 5/ D;: 1>$%2

S?6?5+ G?5 I6 1>2%&

R58,,80 - B/0 1>#'%

S?6?5+ T**8*580 5/ *980 1>#2!

D; C6 #>'31

S?6?5+ @ B/0 I85 M60 #>&4!

C5:85I;0 - I6;5 #>!%$

S?6?5+ @ S*+0 D?685 N8+88* #>3#1

H89 T* #>2'4

E69 I;0 #>2%!

A,5 C5:85 #>214

I;0?55* #>114

MAR+ET %-%"/

URALSIB F860 -#>1#&

A,5 C5:85 E131

O8 F/ , I/0685 R*06*8 5/

D;: -#>2'$URALSIB P60:*8; I;00 -#>334

RVM M95:80 -#>34!

T650U8 @ E56 -#>'&!T?8e 0. F5nd; S@?3>e 3?

)he ne6t traditional performance measure- )reynor Ratio$ named after 5ac# )reynor$ isanother useful measure of

performance that is also relevantwhen comparing mutual funds

72


73/92

within a category. )he )reynor Ratiois a mutual fundKs e6cess returndivided by its beta$ where e6cessreturn is the actual return less theris#-free rate of return. )he )reynor

Ratio is a measure of e6cess return per unit of systematic ris#.

8omparing the )reynor ratiofor the fund with the mar#et e6cessreturn we can analyCe if the manager obtained superior performance.

In the table D 3unds+ )reynor Ratio you can find )reynor Ratio of %& funds and mar#et$ which is e"ualto &$&11 . ,e can see that 11 fundsfrom %& have the indicator higher$ so

managers of these funds showedsuperior information or managements#ills. )he best one is :Alfa 8apital;with D!$&1

F5nd n?#'1

R58,,80 - B/0 !>!4%

C5:85I;0 - I6;5 2>2%'

T650U8 @ E56 2>22$O8 F/ , I/0685 R*06*8 5/D;: 1>2$$

I;0?55* #>&&%

H89 T* #>%%2

D; C6 #>4'&

RVM M95:80 #>43#

S?6?5+ @ S*+0 D?685 N8+88* #>24%

E69 I;0 #>23!

MAR+ET %-%11

URALSIB F860 -#>#!%

A,5 C5:85 E1!$

URALSIB P60:*8; I;00 -#>2#&

S?6?5+ @ B/0 I85 M60 -#>!'$

S?6?5+ T**8*580 5/ *980 -#>'&%

R*06*8 5/ D;: -#>''&

S?6?5+ G?5 I6 -1>%23

A,5 C5:85 R06; F/ -2>1!%

R06; -3>1'1 T?8e 7. F5nd; T3e=n3 3?

3inally$ the 'rd traditional performance measure is 5ensen+s

73


74/92

Alfa. It can be defined as thedifferential between the return on the

portfolio and the return e6plained bythe mar#et model.

Also$ it can be defined as the

intercept in a regression of the portfolio e6cess return against themar#et e6cess return.

If S & the e6cess fundreturns are not completely e6plained

by the 8A2= and the fund manager seem to have some e6tra s#ills in

portfolio management or superior information. If Sp & the fundmanager obtained inferior

performance.

In the table /$ we are goingto see the ran#ing data from thehighest to smallest 5ensen Alfa.)herefore$10 Russian investmentcompanies out of %& have alphamore than &. )he highest result has^elovoy 8entr_ with 0B$'/.

F5nd n?3&

R*06*8 5/ D;: 22>3!S?6?5+ G?5 I6 1'>&2

S?6?5+ T**8*580 5/ *980 1%>!#

S?6?5+ @ S*+0 D?685 N8+88* 4>'&

A,5 C5:85 R06; F/ 4>'$

R58,,80 - B/0 3>%'

S?6?5+ @ B/0 I85 M60 3>%2

R06; 3>!'

C5:85I;0 - I6;5 3>4!

H89 T* 2>'!

E69 I;0 2>%2 A,5 C5:85 1>!#

I;0?55* 1>#$

MAR+ET %-%%G

RVM M95:80 -1>$$

O8 F/ , I/0685 R*06*8 5/D;: -1>&'

T650U8 @ E56 -1>'3

A,5 C5:85 E2'

URALSIB F860 -2>2'

URALSIB P60:*8; I;00 -!>3$T?8e ". F5nd; en;en ?8>@?

74

8/18/2019 THE

the performance of investment companies in russia

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