Can equity mutual funds outperform the benchmark and simple passive portfolios?

Adedeji Ajadi

Journal menu

Can equity mutual funds outperform the benchmark and simple passive portfolios?

Adedeji Ajadi

https://doi.org/10.22495/bprv2i1p1

Abstract

This study evaluates the risk-adjusted performance of equity mutual funds in Nigeria against the market benchmark and two alternative passive portfolios available to investors. Data on monthly net asset values (NAVs) of 30 actively managed, equity-based mutual funds that operated in Nigeria between 2012 and 2021 were collected and analyzed. Risk-adjusted performance measures including the Treynor ratio, Sharpe ratio, Jensen’s alpha, information ratio, Modigliani–Modigliani (M2) measure, Sortino ratio, and the Fama-French 3-factor regression model are used to evaluate the performance of mutual funds. Evidence shows that the Nigerian equity mutual fund portfolio does not deliver excess risk-adjusted returns, and underperforms the three simple passive portfolios against which it was benchmarked. However, mutual fund portfolios provide robust, low-cost diversification benefits and could be considered as part of a well-diversified portfolio of assets. This study explores investment strategies, with practical implications for investors, industry professionals, regulation, and academia. It provides a useful guide to retail investors and their advisers on managing their investment portfolios in the Nigerian stock market. In addition, it validates the veracity of the efficient-market hypothesis (EMH), implying that, on average, seeking alpha is, perhaps, a futile effort.

Keywords: Mutual Funds, Risk-Adjusted Returns, Nigeria Exchange Limited, Efficient-Market Hypothesis, Portfolio Management, Diversification, Fama-French 3-Factor Model

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G11, G12, G14, G23

Received: 05.02.2024
Accepted: 03.06.2024
Published online: 05.06.2024

How to cite this paper: Ajadi, A. (2024). Can equity mutual funds outperform the benchmark and simple passive portfolios? Business Performance Review, 2(1), 8–15. https://doi.org/10.22495/bprv2i1p1

Amount: 14 EUR

The payment can be made with credit/debit card via secure payment system provided by Ukrainian processing center. During the payment, you will probably receive an SMS from your bank with the password to confirm the transaction. The price in Euro is an oriented one. The payment will be charged in UAH according to the exchange rate of your payment card provider. Once the payment is made we will process it ASAP and our representative will contact you to deliver the service/confirm the payment.