If you happen to have an investment with Databank, Republic investment and Strategic African Securities, this is a good read for you.
Let’s get started, over the past few years there’s a lot of noise around which investment are the best in the country. In this write up we present to you an introductory analysis of mutual funds with focus on equity mutual funds in Ghana.
Interesting enough, we present to you the performance of three (3) of the most popular mutual funds in Ghana with neat visuals.
Let’s take data from the past 10 years ending 2020. These data represent the returns on these investments as published in their reports.
This data shows that for the past 10 years on average, Databank’s Epack has generated 14.43% for its investors, Republic Investments on the other hand also made 14.15% for its investors while SAS Fortune Fund has made 17.59% for its investors. The benchmark which is the GSE Composite Index has made 10.4% averagely over the past 10 years.
The table below indicates the average returns of these mutual funds for the past 10 years and the risk associated with it(standard deviation)
It can be seen that all these funds have done better than the benchmark which is a good thing. After all, we are paying them to do better than average.
A critical look at these funds show that they are not generating returns far from each other. But what you need to know is that 1 % more returns on an investment compounded over a long period of time is a whole lot of money.
Taking a look at the risk of these equity funds, it can be seen that, although the average returns by Databank Epack is almost the same as Republic Equity, the risk associated with this returns is higher for Databank( 30.66%) as compared to Republic (21.44%).
A good question is, why is it that they are all equity mutual funds but produce different returns and have varied risk? Although the management of these funds have a hand in the returns and risk associated with these funds, one of the keys that will help us know what is really happening is the securities they have in their portfolios.
The chart below shows the risk and the returns on these funds.
It is already clear that SAS has being doing better averagely for the past 10 years. But what we also have to take into consideration is that it also carried a risk higher than Republic Equity.
Only when we integrate both the risk and the return, known as “risk adjusted returns,” can we determine which investment is a better fit. A risk-adjusted return calculates an investment’s profit after factoring in the amount of risk it took to get there. In other words, the risk adjusted returns shows how much profit your investment has made relative to the risk the investment has represented over a period of time. The purpose of risk adjusted returns is basically to help investors determine whether the risk taken is worth the reward.
The Sharpe ratio and the Treynor ratio are two approaches for risk-adjusted performance, each providing a somewhat different conclusion.
In any case, risk-adjusted return is meant to assist investors in determining if the risk they took was worth the expected benefit.
In this write up, we will introduce you to Sharpe ratio and Coefficient of variation.
Coefficient of variation
The goal of the coefficient of variation is to determine the risk (Standard deviation) to the reward (Returns) ratio. The higher the coefficient of variation, the higher the level of risk associated with the average return. The lower the value of the coefficient of variation, the better.
An investor can calculate the coefficient of variation to help determine whether an investment’s expected return is worth the risk it is likely to experience over time. A lower ratio suggests a more favorable tradeoff between risk and return. A higher ratio might be unacceptable to a “risk-averse” investor.
The three potential investments being scrutinized here are Databank Epack, Republic Equity and SAS Fortune Fund. A quick use of the COV formula shows the following:
From the result using the coefficient of variation it is advisable to resolve to Republic equity followed by SAS Fortune Fund before the Databank Epack due to its high volatility.
Thus investors who do not love risk are better of with Republic Equity then SAS Fortune Fund before Considering Databanks’ Epack.
Sharpe Ratio is used to help an investor to understand the returns on an investment compared to its risk. The ratio is the average returns earned in excess of risk-free rate (usually 91-day treasury bill rate) divided by the total risk (standard deviation). The Sharpe ratio is used as a measure to maximize returns and reduce volatility(risk). The higher the Sharpe ratio, the better. This is because a higher ratio indicates that an investment or portfolio is making better investment decisions and not being controlled by the risk associated with it.
Sharpe Ratio =
where Rp is the return on the investment
Rf is the risk-free rate
op is the standard deviation of the investment
A Sharpe ratio of 1 is a good investment. If it is 2, then it’s very good
A Sharpe ratio of 3 or more is an excellent or exceptional investment.
Hold on, we are getting there…You will soon find out which is best…
The average risk-free rate from 2011 to 2020 is 17.70% that is the average 91-day treasury bill rate. And from the past 10years the returns of the equity mutual funds of Databank Epack, Republic Equity and SAS Fortune Fund are 14.431%, 14.150%, and 17.594% respectively. The risk associated with these equity mutual funds are 30.66%, 21.81%, and 28.95% respectively. The Sharpe ratio for Databank Epack is 13.85, Republic Equity is 13.34, and SAS Fortune Fund is 16.98. We can all agree that SAS Fortune Fund has been doing the most. Hence we will conclude that, in the past 10 years, the best performing equity mutual fund is…..
Don’t get too excited, and don’t feel bad if your investment is not on top. These metrics are not the only measure we use to calculate the best investment. Take a look at their fees net it against the returns. You probably will have a fair idea of what will happen. We will leave that for another post.
Note: this write up cannot and should not be used as an investment advice. It is research and analytics carried out by Student Analysts Trainees @ The Finance Focus. It also must be noted that our analysis focus on only funds that have data for the past 10 years. There are other mutual funds, you can check them out.
If you need more insight and education, don’t hesitate to contact us.
By Student Student Analysts @ The Finance Focus