Available Online: http://www.ejpau.media.pl/volume19/issue2/art-03.html
DID THE FINANCIAL CRISIS IMPACT THE LEVEL OF INVESTMENT EFFICIENCY OF EQUITY INVESTMENT FUNDS IN POLAND?
Sylwester Kozak, Emil Ochnio
Faculty of Economic Sciences, Warsaw University of Life Sciences - SGGW, Poland
Using the monthly data from 26 equity investment funds operating
continuously in Poland in 2005–2014, it was found that the financial crisis
contributed to a significant reduction in the efficiency of the funds from 2008
onwards. Rates of return which funds achieved in the following years were many
times lower than during the pre-crisis period. Risk mitigation strategy could
cause that in times of the economic growth the performance of funds were weaker
than the market, but oppositely better than the market in periods of crisis and
economic slowdown. The negative impact of the crisis on funds’ performance
is also confirmed by the declining values of the Sharpe index. The level of risk
indicates that an additional risk taken by funds increased their rates of return
in good times, but even more weakened them in the periods of economic downturn.
The level of this correlation depends on the dynamics of changes in the stock
Using the monthly data from 26 equity investment funds operating continuously in Poland in 2005–2014, it was found that the financial crisis contributed to a significant reduction in the efficiency of the funds from 2008 onwards. Rates of return which funds achieved in the following years were many times lower than during the pre-crisis period. Risk mitigation strategy could cause that in times of the economic growth the performance of funds were weaker than the market, but oppositely better than the market in periods of crisis and economic slowdown. The negative impact of the crisis on funds’ performance is also confirmed by the declining values of the Sharpe index. The level of risk indicates that an additional risk taken by funds increased their rates of return in good times, but even more weakened them in the periods of economic downturn. The level of this correlation depends on the dynamics of changes in the stock market.
Key words: investment funds, efficiency of funds, investment risk, Sharpe index.
The recent developments in the investment fund sector lead to the questions whether the financial crisis, in Poland mainly perceptible in 2008–2009, had a negative impact on the efficiency of the equity investment funds and whether in subsequent years, their performance was comparable to that achieved before the crisis. To answer these questions activities of 26 equity funds continuously operating in 2005–2014 were examined. The primary source of the monthly data was the Chamber of Funds and Asset Management, as well as the Central Statistical Office (GUS), the Polish Financial Supervision Authority (KNF) and the National Bank of Poland (NBP). Rates of return of investment funds was assessed using logarithmic monthly rates of return, the level of risk by rates standard deviation and fund’s efficiency by the Sharpe index. All measures were calculated for the individual funds. The performance of the entire market was assessed using the Warsaw Stock Exchange index (WIG).
The remaining part of the study has the following structure. The next section reviews the literature on the measures used for assessing efficiency of investment funds and the impact of the crisis on funds` performance. The following presents the data, methods, as well as the discussion of results of the research on the investment funds investment activities. The analysis is summarized in the conclusions.
Investment funds as a form of capital allocation and mutual investment appeared in the second half of the eighteenth century. The first fund called Eendragt Maakt Magt was established in 1774 by Danish broker Abraham van Ketwich . The fund gave the opportunity to invest small investors who, after the financial crisis of 1772–1773 possessed limited amounts of savings. At that time, a major advantage of such investments was to reduce risk through geographical diversification including investments in Denmark, Germany, Austria, Spain, Sweden, or Russia.
Investment funds most strongly developed their activities in the United States. In 1904 it was established there the first closed-ended investment fund, and in 1924 the first open-ended fund. At the beginning of the financial crisis in 1929 in the US market operated 400 funds with total assets of 3 billion USD . Before World War II in Europe and Japan banks almost exclusively dominated the market of long-term investment of households’ savings. Starting from the 1990s investment funds became the most popular in the United States, and also in Europe. During that decade the value of the European funds` portfolios increased several times from less than 500 million euros to more than 4,500 billion euros . Initially, the area of investments concentrated on the money market and the debt securities market. Next funds started to invest in shares of listed companies.
In Poland, the investment fund industry started its activities in July 1992 with the creation of the Pioneer First Polish Trust Fund. Its formation was associated with opening the Stock Exchange in Warsaw (WSE – Warsaw Stock Exchange) in the same year. Strong growth of the investment funds’ assets fell for the years of bull market on the WSE, i.e. 2005–2007 (Fig. 1), which resulted, among others, from the improving Poland’s economic situation after the EU accession in 2004 (Fig. 2).
Fig. 1. The values of stock indices: WIG, WIG20 and mWIG40, 2005–2014
Source: WSE; http://www.gpw.pl
Fig. 2. Growth of GDP and households financial assets, 2005–2014
Source: the GUS
In Poland the financial crisis contributed to a strong outflow of funds from the investment fund sector in 2008 (Tab. 1). The balance of payments and redemptions that year amounted to -29.8 billion PLN, which led to a decline in the value net assets of the fund sector from 133.9 to 73.7 billion PLN. It decreased the importance of investment funds in the financial sector and in the entire economy. As a result the relationship of the funds` assets to GDP in Poland fell from 12 to 5% . Improvements of the economic situation in 2010 allowed gradual restoration of confidence of individual investors to investment funds. It also resulted in the growth of demand for the funds’ participation units.
The process of economic recovery was accelerated by loosening of monetary policy conducted by the NBP. A series of cuts in interest rates initiated in the fourth quarter of 2012 clearly weakened demand for ever low interest-bearing bank deposits. In addition, the upswing in results of funds was positively impacted by the improvement of the situation on the global capital markets, including the WSE. As a result, at the end of 2014 the investment sector was composed by 481 funds managed by 58 investment fund companies (TFI). The total value of assets under the sector’s management rose to 208.9 billion PLN and was more than three times higher than its value in 2005.
Table 1. Investment funds sector in Poland, 2005–2014
and redemptions (PLN bn)
Note: TFI – investment fund company.
Source: Chamber of Funds and Asset Management.
Investing in investment funds is substantially dependent on their performance, which is measured with the rate of return and some metrics that take into account the risk associated to assets constituting the investment portfolio. In the literature, the studies on funds’ efficiency to the greatest extent are focused mainly on the US market. Among others, Du et al.  examining performance of funds investing in corporate bonds in the United States in 1992–2003 found that their achievements depend on the skills of the management teams and the appropriate way of risk diversification.
In the European investment fund sector the research conducted by Dietze et al.  shows that the majority of funds investing in the bonds of German corporations do not achieve better results than other types of funds. It was also found that in the long run the results of individual funds are positively influenced by the longer period of fund’s operation, the use of lower fees and smaller exposure to more risky lower-rated bonds.
Relatively few studies were dedicated to an analysis of the impact of the financial crisis on the funds’ performance. Babalos, Mamatzakis and Matousek  examining the effectiveness of investing in equity funds in the United States in the years 2002–2011 noticed that the financial crisis had a negative impact on their results, although the impact had only a short-term nature. The funds reached the weakest performance in 2008. However in the preceding and the following year the negative disturbances were only slight. In other years the results have been relatively stable. Additionally they found that the financial crisis contributed to the strongest dispersion of returns of equity funds in 2008.
In turn, Moneta  points to significant losses which bond investment funds incurred during the public finance debt crisis. This claim is based on research on performance of funds operating in 2010–2013 and investing in Treasury bonds of Southern European countries (including Portugal, Italy, Greece, Spain and Ireland). He also notes that the deterioration was rather of short-term nature. Such a positive effect and resistance of funds to economic shocks resulted mainly from the adequate geographic and instrumental diversification of their portfolios.
In Poland Dawidowicz  analyses the structure of the investment fund sector in terms of the results achieved at the beginning of 2014. The research indicates that funds’ rates of return are weakly correlated with the structures of their portfolios, and the largest share in the portfolios’ structure constituted the Polish equity funds.
Perez  examined rates of return of 75 Polish equity funds which invest their assets in domestic and European markets from July 2004 to June 2009. The results showed that funds that reached a negative rate of return in the short and long term most often ceased their operations. As a result, the market was cleared of inefficiently managed funds.
Zamojska  compared the management efficiency of investment portfolios of open-ended investment funds (FIO), open-ended specialized investment funds (SFIO) and closed-ended investment funds (FIZ). The study was conducted for 106 investment funds operating between January 2008 and December 2012. It showed that during the period of economic slowdown open-ended funds achieved higher returns than closed-ended funds.
Jurek-Wasilewska  examined the effectiveness of Polish open-ended investment funds (equity funds, mixed, balanced funds, debt and money market) operating in the post-crisis period. The research shows that the performance of funds, regardless of their investment policies, do not differ significantly from the performance of the market portfolio, or they are even slightly worse. This rule refers both to debt and equity funds, which could not achieve higher returns than portfolios of the market.
The research of Jamróz  on 15 equity funds operating in 2003–2011 also shows that funds underperform the results of the market. Using efficiency indicators of Sharpe, Treynor and Jensen find that funds could not adjust the structure of their portfolio to successfully cope with the changing market situation. Such statement was also confirmed by Kompa and Witkowska  and Jamróz . Additionally Jamróz  indicates that efficiency of funds’ investment activities during the economic growth was higher than during the downturn.
METHODS OF ASSESSING THE FUNDS’ INVSTMENT EFFICIENCY
The assessment of the fund investment efficiency is frequently conducted with methods proposed by Sharpe , Treynor  and Jensen . In this study we use the procedure for assessment of efficiency of funds proposed by Witkowska . First, we calculate funds` monthly rates of return, the level of risk implied in the funds` portfolios and efficiency of funds measured with the Sharpe index. Additionally, the investment efficiency of the market was computed to check if funds under or over perform the market.
The monthly rate of return is defined with the logarithmic function:
Rt – rate of return in month t,
Pt and Pt-1 – values of the investment fund unit, respectively, in month t and t-1.
For the assessment of the fund performance over the analyzed periods the value of the average rate of return (RT) in the period T was calculated as:
The analysis of the level of risk undertaken by the fund was carried out using the standard deviation (ST) in period T defined as:
The efficiency of individual investment fund was assessed using the Sharpe index:
where: for the period T,
Rp – average rate of return of the portfolio of fund p,
Rf – average rate of return on risk-free investment,
Sp – standard deviation of rates of return of fund p.
To compare efficiency of the investment funds with the results achieved by the market the Sharpe index for the market (WSm) was calculated according to the formula:
where: for the period T,
Rm – rate of return of the market (in the research represented by the WSE index – WIG),
Sm – standard deviation for the market rates of return calculated according to the equation (3).
The sample was composed of 26 open-ended investment funds. The investment strategy of these funds focused on investing exclusively in equity instruments. In case of mixed funds their portfolios characterized with a dominant share of equity. For the research they were taken only funds which continuously conducted their activities in the years 2005–2014. It enabled to compare the performance of the same fund before and after the financial crisis.
The data on the values of the participation units and assets of funds come from the website of the Chamber of Funds and Asset Management (www.izfa.pl). Monthly frequency of data helps more precisely control changes in the rate of return on funds` units. The data on the market were obtained from the website of the Warsaw Stock Exchange (www.gpw.pl). As the risk-free rate of return the yield of two-year Treasury bond was applied. Generally in the literature as the risk-free investment is considered the purchase of 26-week Treasury bills. However, in Poland since 2012, the yield on T-bills is not quoted due to the cessation of their emissions by the Minister of Finance. On the other hand, accepting for this purpose WIBOR (Warsaw Interbank Offered Rate), for example 6 months or a year, might be a subject of an error due to the low liquidity of interbank loans with such long maturities. Published rates of WIBOR 6M, or 1Y do not reflect the real situation of the market and have more statistical nature, since they are based on declarations of banks, rather than on actual transactions .
RESULTS AND DISCUSSION
To assess the impact of the crisis on the investment efficiency of investment funds three periods were identified:
- Pre-crisis – the years of 2005–2007,
- Crisis – the years of 2008–2009,
- Post-crisis – the years of 2010–2014.
For these periods average monthly rates of return and their standard deviations were calculated (Tab. 2).
Table 2. Average monthly rates of return and standard deviation, 2005–2014
Notes: ALLIANZ – Allianz Akcji, ARKA – Arka BZ WBK Akcji Polskich, AVIVA1 – AVIVA Investors Aktywnej Alokacji, AVIVA2 – Aviva Investors Polskich Akcji, AVIVA3 – Aviva Investors Stabilnego Inwestowania, BPH1 – BPH Akcji, BPH2 – BPH Akcji Dynamicznych Spółek, BPH3 – BPH Akcji Europy Wschodzącej, BPH4 – BPH Zrównoważony, CA – Credit Agricole Stabilnego Wzrostu, ING1 – ING Akcji 2 SFIO, ING2 – ING Akcji, ING3 – ING Średnich i Małych Spółek, INVR1 – Investor Akcji Dużych Spółek, INVR2 – Investor Akcji, INVR3 – Investor Top 25 Małych Spółek, KBC1 – KBC Aktywny, KBC2 – KBC Beta Dywidendowy SFIO, LMNA – Legg Mason Akcji, METLIFE – Metlife Akcje, MLNM – Millennium Stabilnego Wzrostu, NOVO – NOVO Akcji, PNR1 – PIONEER Akcji Amerykańskich, PNR2 – PIONEER Akcji Polskich, PNR3 – Pioneer Akcji Europejskich, SKRBC – Skarbiec Akcja, WIG – Warsaw Stock Exchange index.
Source: own deliberations.
The analysis indicates that the median rates of return of funds are lower than the rate of return achieved by the market (represented by WIG). At the same time their portfolios are characterized by a much lower level of risk than the market. The exception is the period of the financial crisis, when funds suffered smaller losses than the market, what may be the result of proper diversification of their investment portfolios. Funds achieved the best results before the crisis. All funds they were the highest scores throughout the analyzed period. This situation is related to strong increases in prices of share listed on the WSE after Poland’s accession to the EU (Fig. 1), as well as to the boom on the real estate market. The periods of pre-crisis and crisis are characterized by a major dispersion of rates of return measured the difference between the maximum and minimum values. These values of dispersion equaled to, respectively, 0.36 and 0.30 and were about four times higher than the average for the entire analyzed period (Tab. 2).
Analyzing the results of individual funds throughout the period of 2005–2014, it should be noted that only a small group of funds was more effective than the stock market. Before the crisis, only five funds managed to approach, but not exceed, the rate of return of WIG. These funds belonged to a group of the larger and the largest funds in the sector. The situation was of a different nature in other years, i.e. in the period of crisis and during the recovery from it when most funds proved to be more effective than the market. Such better performance could result from the appropriate diversification of funds` investment portfolios. In a result funds incurred fewer losses in periods of economic slowdown and the stock declines on the WSE. However the underperformance of funds before the crisis impacted so significantly, that average monthly rates of return for the entire period were lower than for the stock market in Poland. Only three large funds ARKA, ING1 and LMNA achieved rates of return similar to the market (Tab. 2).
It is difficult to prove clear relationship between the value of the funds' assets and the level of their rates of return (Fig. 3). The rates of return of two the biggest and two the smallest funds (in terms of assets) were more volatile than the average in the sector. In periods of growth on the WSE their efficiency was much higher than the median, while in periods of stocks` decline much lower than the median (especially the years 2008 and 2011). Larger investment funds were more volatile than the rest of the sample.
Fig. 3. Average monthly rate of return of investment funds of the largest and the smallest value of assets, 2005-2014
Notes: the largest investment funds: ARKA – Arka BZ WBK Akcji Polskich, PNR2 – PIONEER Akcji Polskich; the smallest investment funds: BPH3 – BPH Akcji Europy Wschodzącej, KBC2 – KBC Beta Dywidendowy SFIO; Median – the median for the investment funds sector, WIG – Warsaw Stock Exchange index – WIG
Source: own deliberations
Generally for the entire analyzed period it could be stated that equity funds obtained better rates of return by taking more investment risk (Fig. 4). However, the relationship was dependent on the situation on the Warsaw Stock Exchange. In periods of strong increases in share prices, including in 2005, 2006 or 2013, additional risks brought significant greater improvement in rate of return of funds than in years with relatively moderate increases in share prices. On the other hand, during periods of stronger declines on the Warsaw Stock Exchange, including 2008 and 2011, by taking additional risk funds achieved negative effects. Changes in the slope of the linear trend line reflecting the approximate relationship between risk (as measured by standard deviation) and efficiency of investment (return) indicate that in periods of stronger growth on the WSE it is justified for funds to increase aggressiveness of investing, and during periods of declines, funds should take a more secure policy investment.
Fig. 4. The relationship between the funds rate of return and the level of investment risk in years: a) 2005–2007; b) 2008–2009; c) 2012–2013
Note: on the graphs: horizontal axis – the standard deviation of returns, the vertical axis – the rate of return
Source: own deliberations
To assess the overall investment efficiency Sharpe index was calculated for all investment funds (eq. 5). The index compares the fund's rate of return with the rate of return of risk-free investment and then refers it to the size of the risk taken by the fund. The Sharpe ratio is the classic measure developed Sharpe to assess efficiency of investments in equity, what makes this measure suitable for assessing funds investing more in equity instruments.
The results of the analysis indicate that before the crisis only one fund (LMNA) was more effective than the entire stock market (WIG). Among the remaining funds, better efficiency characterized larger entities investing in shares on the Polish market, including ING1, AVIVA2, INVR3 or INVR2 (Tab. 3).
Like the rates of return, in times of crisis the efficiency of funds was much higher than the stock market, what could result, inter alia, from their strategies of reduction and diversification of risk. In the period of recovery from the crisis funds performed better than the stock market. In the post-crisis period (2010–2014) for only 5 out of 26 funds Sharpe index was lower than for the WIG. However, when assessing the entire analyzed period it should be noted that the weaker results achieved before the crisis caused that the Sharpe index for the WIG is higher than for all equity investment funds, with the only exception of ING1 and LMNA.
Table 3. Rank of funds and Sharpe indices, 2005–2014
Note: descriptions like in Table 2.
Source: own deliberations.
Investment portfolios of the equity investment funds in Poland are largely focus on shares listed on the Warsaw Stock Exchange. The results showed, like Witkowska , that in Poland in the years 2005–2014 the investment efficiency of the equity investment funds investing significantly in the Polish market depends on the situation on the Warsaw Stock Exchange.
Like Babalos, Mamatzakis, and Matousek  the study showed that the financial crisis as well as the economic downturn had a negative impact on the rates of return earned by investment funds. In turn, the economic recovery and improving situation on the WSE increased the efficiency of investment funds.
During the financial crisis, investment funds suffered much smaller losses than the entire stock market, while in periods of economic upturn the results were much weaker than the market, what might result from funds’ diversification strategy and mitigation variability of the results. The stronger variability of rates of return was observed in case of the largest and the smallest funds.
There is a relationship between the rates of return and risk taken by the fund, although the strength of this relationship depends on the situation on the Warsaw Stock Exchange. During the periods of the increase on the WSE these terms are correlated positively and during the stock market deterioration negatively. The value of the correlation ratio depends on the strength of change of the stock indices.
The negative impact of the financial crisis on the efficiency of equity investment funds is confirmed by the declining values of Sharpe index. This was due to the fact that during the financial crisis and economic slowdown rates of return of all funds were lower than yield on two-year Treasury bond considered as a risk-free investment.
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Accepted for print: 3.06.2016
Faculty of Economic Sciences, Warsaw University of Life Sciences - SGGW, Poland
161 Nowoursynowska Str., 02-787 Warsaw, Poland
Faculty of Economic Sciences, Warsaw University of Life Sciences - SGGW, Poland
161 Nowoursynowska Str., 02-787 Warsaw, Poland
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