Portfolio Analysis of MTB

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Portfolio Performance Analysis of the Mutual Funds of

Investment Corporation Of Bangladesh31th October,2011


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Internship Report on

Portfolio Performance Analysis of the Mutual Funds of

Investment Corporation of Bangladesh

Submitted to

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

Submitted By

Abu Bakar Seddeke

13th

Batch, ID-098Department of Finance

University of Dhaka

Date of Submission: 31th

October, 2011


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Supervisor Sirs Certificate

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

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

carried out successfully.

Supervisor

Jahangir Alam Chowdhury, Ph.D.Professor,Department of FinanceFaculty of Business StudiesUniversity of Dhaka.


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Declaration

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

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

Abu Bakar Seddeke

Roll: 13-098(B)BBA, 13th BatchDepartment of FinanceUniversity of Dhaka.


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October 31th October, 2011Jahangir Alam Chowdhury, Ph.D.Professor,Department of Finance,University of Dhaka

Subject: Submission of internship report on Portfolio Performance Analysis of the MutualFunds of Investment Corporation of Bangladesh.

Dear Sir:In connection to my practical orientation at Investment Corporation of Bangladesh, I submit herewith my internship report title Portfolio Performance Analysis of the Mutual Funds ofInvestment Corporation of Bangladesh.

I have tried my level best to successfully complete my internship program through theorganizational attachment as well as a complete report. As an intern it is usual that report maylack professionalism in some cases. For any unintentional inadequacy in the report, yoursympathetic consideration would be highly appreciated.

I sincerely expect that you would be kind enough to accept my report for evaluation and obligedthereby.

Sincerely Yours,

Abu Bakar Seddeke13th Batch, ID-098Department of FinanceUniversity of Dhaka

Letter of Transmittal


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Acknowledgement

In the process of preparing this report I received persistent cooperation from number of

individuals whose names are not possible to mention in this report but I would remember themwith my heart felt appreciation and gratitude.

First of all, I am very much grateful to Almighty Allah who gave blessings, courage and abilityto prepare this report. I am very much grateful to Jahangir Alam Chowdhury, Professor,Department of Finance, University of Dhaka, for guiding me to complete my internshipprogram. I am also highly indebted to him for his scholarly and constructive suggestion whichwas of much assistance to prepare this report on Portfolio Performance Analysis of the MutualFunds of Investment Corporation of Bangladesh.

During the course of internship program I have got cooperation from number of officials and

employees from Investment Corporation of Bangladesh. I render my gratitude to them forhelping me carry out the Internship in a favorable environment. Finally, I would like show myprofound gratitude to all of the respected teachers of the Department of Finance for mentoringme throughout the undergraduate program.


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Serial no Topic Page no

1 Acronyms 7

2 Executive Summary 8-9

3 Chapter-1: Introduction 10-14

4 Chapter-2: Literature

Review

15-17

5 Chapter-3: An overview of

ICB

18-24

6 Chapter-4: About Mutual

funds Of ICB

25-36

7 Chapter-5: Performance

Analysis of ICB

Mutual Funds

37-56

8 Chapter-6: Findings and

Conclusion

57-59

9 Reference 60-61

10 Appendices 62

Table of Content


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ACRONYMS

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


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Investors want to invest their surplus money in dependable, reliable institution which offerssecured, liquidity as well as attractive rate of return. Investor demands are differ from one toanother. To meet the need of investors of all types, a wide range and adequate number of

securities should be made available in the capital market. Institutions and institutional supportsare absolutely necessary for such capital market activity. Investment Corporation of Bangladesh(ICB), as one of the largest investment banks, is the pioneer organization to perform theactivities by creating demand for securities and on the other hand to ensure the supply ofsecurities in Bangladesh capital markets. ICB Mutual Funds are also supporting ICB to fulfill itsobjectives to mobilize savings and to develop the capital markets. Initially, the activities of ICBwere limited to underwriting public issue of shares, bridge financing, debenture financing andopening/maintaining investors' accounts (Investors' Scheme). ICB had largely expanded its areasand scope of activities and now provides various types of investment and banking services.Added activities include providing debenture loans to companies and loans to investors onmargin trading basis, providing advances against ICB unit certificates, leasing of industrial

equipment, managing unit fund and mutual funds, and participating in stock exchange for tradingsecurities.

As a component of the restructuring program of ICB under Capital Market DevelopmentProgram (CMDP) initiated by the Government of Bangladesh (GOB) and the AsianDevelopment Bank (ADB) and in terms of power conferred in the ICB Ordinance threesubsidiary companies namely (i) ICB Capital Management Limited, (ii) ICB Asset ManagementCompany Limited; and (iii) ICB Securities Trading Company Limited have been created andmade operational to carry out merchant banking, mutual fund operations and stock brokeragefunctions respectively.

Mutual funds are investment companies that own large, diversified portfolios of securities(mainly stocks, bonds and derivatives) selected by skilled securities analysts (with the exceptionof index mutual funds), purchased with money raised by selling shares of the mutual funds toinvestors and managed by highly qualified investment professionals. Mutual Funds substantiallylower the investment risk of retail investors and reduce transaction costs. Because funds areprofessionally managed and strictly regulated, investors consider these sorts of investment toolsas some of the most secured securities in stock markets.

The mutual fund industry in Bangladesh is at its early or emerging stages, offering room forgreater growth and product innovation. Mutual Funds contribution is bigger than other securitiesin developed countries. The contribution of the existing Mutual Funds in terms of the local stock

market capitalization is around 3%, which is more than 50% in many developed countries suchas US and Europe. The number of mutual funds in our country did not grow to that extent,mainly because of poor knowledge and the dearth of professionals. Educating investors is also abig challenge for any asset management company.

Insufficient number of trustees and custodians are other major challenges for the smoothfloatation of mutual funds. Despite the challenges, there are huge opportunities to develop thissector. A recent study indicates that Bangladesh's mutual fund sector has every possibility to

Executive Summary


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grow at 40 percent a year in the next five years. RACE Management, a second generation assetmanagement company who conducted the study, forecasts a Tk 10,000 crore growth for 2015, interms of assets. The formation and operation of Mutual Fund in Bangladesh is constituted in theform of a Trust made by virtue of Deed of Trust in accordance with the provisions of Trust Act,1882 and under the provisions of the Securities and Exchange Commission (Mutual Fund) Rules,

2001. This instrument of trust has to be registered under the provisions of the Registration Act,1908. Mutual funds are the most regulated securities in our stock markets.

In Bangladesh ICB has pioneered Mutual Funds for the sake of investors and of the capitalmarket. Out of the total 27 (twenty seven) Mutual Funds, ICB and its Subsidiary have so farfloated 20 (twenty) Mutual Funds in the Markets. Countrys first mutual fund, the First ICBMutual Fund was launched on 25 April 1980. Since then ICB had floated 9 mutual funds up to

1996. All the ICB mutual funds are closed-end fund except ICB Unit Fund. ICB Unit Fund is anopen-end mutual fund. Measuring of portfolio performance has become an essential topic in thefinancial markets for the portfolio managers, investors and almost all that have something to doin the field of finance and it plays a very important role in the financial market almost all around

the world. At one time, investors or analysts evaluated portfolio performance almost entirely onthe basis of the rate of return. They were aware of the concept of risk but did not know how toquantify or measure it, so they could not consider it explicitly. Treynor (1965) developed the firstcomposite measure of portfolio that included riskTreynor Measure. Since then Jensen Alpha(1968), Sharpe Ratio (1966), Famas Return Decomposition (1972), numerous performancemeasures have been proposed.

The portfolio performance of the ICB Mutual Funds were measured based on the compositeportfolio performance measures and the composition analysis of the funds portfolios and rankthe mutual funds accordingly. Treynor measures and Sharpe Ratios have provided differentranking of the mutual funds. The underlying logic behind the difference is diversification. Theportfolios of ICB Mutual Funds are not completely diversified. As a result poorly diversifiedportfolios had high ranking on the basis of the Treynor measure. Famas Return Decompositionhas indicated negative selectivity for most of the ICB Mutual Funds except Fifth and Fourth ICBMutual Fund. It reveals the fact that in most of the cases, except those two funds, portfoliomanagers of ICB fail to diversify away the unsystematic risk properly through their portfolioselection strategy. Portfolios of all the ICB Mutual Funds are highly dominated and concentratedto a few number of stocks. Sectorial domination is also very high in the portfolios of ICB MutualFunds. ICB as the fund manager mainly focuses on the stocks of high market capitalized andhighly profitable companies. Earning multipliers, price-to-book value ratios and dividend historyare also considered at the time of constructing or rebalancing the portfolios. The mutual funds ofICB have been trying to facilitate and stabilize the secondary markets of our country for severaldecades. These funds have been playing the key role to ensure the liquidity of securitytransaction in the burses. ICB usually stands its position against the hard effect and try to ensurethe proper supply and demand of securities in the markets through its own portfolio and themutual funds.


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Chapter outline:Chapter Outline

1. Introduction

1.1. Origin of the Report1.2. Objectives of the Report1.3. Scope of the Study

1.4. Methodology1.5. Limitations

Chapter-1: Introduction


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1. IntroductionInvesting for the future has never been more important than it is today. The recent financialstorm has left many people shaken, and many more wondering if investing their hard-earnedmoney is even worthwhile anymore. This reaction is certainly understandable. Investment isconsidered as one of the most important and dominant factors of attaining the economic

development of any country. Creation of investment opportunities by providing efficientinstitutional and diverse nature of securities will create positive investment environment to thesurplus units to take the full advantage of their expectation.

The depth of investment opportunities in Bangladesh is very narrow and inadequate. However,Investment Corporation of Bangladesh (ICB) as the state owned Investment Bank has positiverole to play in this respect. Fund management is an important and complex factor to develop thecapital market. There are large amount of local capital available in the hand of small and mediuminvestors and comparatively low use of such fund is a major problem of our country.

Investors want to invest their surplus money in dependable, reliable institution which offers

secured, liquidity as well as attractive rate of return. Investor demands are differ from one toanother. To meet the need of investors of all types, a wide range and adequate number ofsecurities should be made available in the capital market. Institution and institutional supportsare absolutely necessary for such capital market activity. ICB, as one of the largest investmentbanks, is the pioneer organization to perform the activities by creating demand for securities andon the other hand to ensure the supply of securities in Bangladesh capital market. ICB MutualFunds are also supporting ICB to fulfill its objectivesto mobilize savings and to develop the capital market.

ICB Mutual Funds have been mobilizing savings from the investors by way of selling certificatesand investing the funds in portfolio securities in secondary markets so as to ensure maximumreturn for certificate holders and ensure the liquidity of the markets. Return form mutual fundsinevitably depend on the performance and ability of the fund managers to construct and manageportfolios that generate above average risk-adjusted return.

1.1.Origin of the ReportThe Report entitled Portfolio Performance Analysis of the Mutual Funds of Investment

has been prepared as a fulfillment of BBA program authorized byCorporation ofBangladeshthe Department ofFinance, University of Dhaka.

Since the BBA program is an integrated, practical and theoretical method of learning, thisprogram is required to have practical exposure in any kind of business organization. This reporthas been prepared on practical orientation.

1.2.Objectives of the ReportPrimary objective of the report is to meet the requirements for the fulfillment of BBA program.The core objectives of the study are as follows:

To understand the operation and management of investment banking in Bangladesh. To know the role of Investment Corporation of Bangladesh (ICB) as the market maker. To understand the activities and contribution of mutual funds in the capital markets.


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To obtain the knowledge about how the ICB Mutual Funds are managed. To evaluate and analyze the portfolio performance of ICB Mutual Funds.

1.3.Scope of the StudyThe main focus of the study is the analysis of portfolio performance of the mutual funds of ICB.The report intends to analyze the mutual funds of ICB based on mainly the composite portfolioperformance measures. The study is concentrated in Investment Corporation of Bangladesh(ICB) and its activities. The portfolio performances are measured based on the eight closed-endmutual funds floated by ICB First ICB Mutual Fund, Second ICB Mutual Fund, Third ICBMutual Fund, Fourth ICB Mutual Fund, Fifth ICB Mutual Fund, Sixth ICB Mutual Fund,Seventh ICB Mutual Fund and Eighth ICB Mutual Fund. The intention of the study was toidentify the superior selection ability of ICB in constructing the portfolios of all the eight mutualfunds as a fund manager. The study is also intended to give comprehensive insights of the ICBMutual Funds that may help the market participants and analysts to make their decision orfurther analysis.

1.4.MethodologyThis study is conducted based on the application of theoretical knowledge of the field of financeand the practical working experience from Investment Corporation of Bangladesh (ICB) asinternship course. Investment Corporation of Bangladesh is the pioneer and one of the bestperforming investment banks in Bangladesh.

1.4.1. Data CollectionIn order to prepare the assigned report all the necessary data and information have been collectedfrom Primary and Secondary sources.

a) Primary Sources of Information

Primary data had been collected through interviews and discussions with the officials of variousdepartments, study of different files of different sections and the practical working experiencegained from different departments. Normally, head of the departments or their approved officialsgave the briefing about their respective departments.

b) Secondary Sources of InformationThe main sources of the secondary information were the Annual Reports of ICB Mutual Funds,Annual Reports of Investment Corporation of Bangladesh, Dhaka Stock Exchange Library,Investment Corporation of Bangladesh Library, Official website of Dhaka Stock Exchange,Official website of Investment Corporation of Bangladesh and Planning and Research Divisionof Investment Corporation of Bangladesh. Besides, data are also collected from different books,

journals and internet.

1.4.2. Data SamplingFor the analysis purpose time series data have been used. All the performance measures havebeen conducted based on the 120-monthly ending prices of all the ICB Mutual Funds of DhakaStock Exchange from July 2001 to Jane 2011. Dhaka Stock Exchanges General Index (DGEN)has been used as the benchmark index for the same period and the analysis. 364-days Treasurybill has taken as the risk-free rate for the same period.


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1.4.3. Data Analysis

The obtained data have been analyzed from the perspective of qualitative judgments, quantitativeanalysis based on composite portfolio measures and the composition analysis of portfolios ofICB Mutual Funds.

a) Qualitative J udgmentsIn the qualitative analysis, mainly the theoretical aspects of ICB Mutual Funds have beenprovided. Current situation of the capital markets and the problems and prospects of mutual fundsector are also discussed. SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysisof ICB Mutual Funds was the key focus of this section.

b) Quantitative AnalysisPrimarily data have been analyzed based on the early work of portfolio performance measures.The focus was mainly on the Risk and Return analysis. These analyses was conducted based onsome statistical tools namely; Arithmetic Mean and Geometric Mean for return analysis and

Standard Deviations, Beta Coefficients, R-squared and Coefficient of Variations for riskanalysis. Based on the return and risk analysis more advanced financial techniques have beenused Composite Portfolio Performance Measures. The measures include Treynor Measure,Share Ratio, Jensen Measure (single factor) and M2 Measure. Later on an extension of thecomposite measure Famas Return Decomposition has been analyzed to identify the portfolioperformance of ICB Mutual Funds.

c) Portfolio Composition AnalysisIn the portfolio composition analysis, study has been conducted based on the most dominatingstocks (minimum 50% of the portfolio) of the respective mutual funds portfolios. The financialperformances of the companies of the dominating stocks were analyzed based on some keyfinancial indicators like current ratios, debt-to-equity ratios, net profit margins, return onequities, price earnings ratios, earning per share ratios, dividend declarations, market categoryand market capitalizations. Data was collected from the respective companies latest publishedannual reports and the website of Dhaka Stock Exchange. Later on tests of hypothesis have beenconducted to examine statistical significances of differences of variables between each mutualfund and the all ICB Mutual Funds.

1.5. Limitations of the StudyAs previously stated this study has been conducted with the data collected based on a specifictime period may have been affected by the sample selection bias. There are some specificlimitations in this study:

- Relevant information was not as available as required. In some cases updated information wasnot available

- Due to time constraint limited analytical tools have been used to draw the conclusion of thestudy.


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- ICB Mutual Funds are thinly traded shares. Estimates for securities' systematic risk, the betacoefficients, are highly affected by infrequent trading. The beta correction for thinly tradedshares is beyond the scope of this analysis.

- Investment Corporation of Bangladesh (ICB) is one of the largest investment banking

institutions in Bangladesh. In a short span of time like internship program it was not possible toget in-depth knowledge about such a large corporation.

- Officials of ICB maintain a very busy schedule. So they were not always able to provideenough time to enlighten the internee students every time, even if they were very helpful andsupportive.

In the face of these limitations, the study has been conducted and the report has been preparedwith the best efforts and integrity.


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Chapter-2: Literature Review


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2. Literature ReviewMeasuring of portfolio performance has become an essential topic in the financial markets forthe portfolio managers, investors and almost all that have something to do in the field of financeand it plays a very important role in the financial market almost all around the world.

Earlier then 1950, portfolio managers and investors measured the portfolio performance almoston therate of return basis. During that time, they knew that risk was a very important variable indetermining investment success but they had no simple or clear way of measure it.

In 1952 Markowitz created the idea of Modern Portfolio Theory and proposed that investorsexpected to be compensated for additional risk and provided a framework for measuring risk. Inearly 1960, after he development of portfolio theory and capital asset pricing model insubsequence years, risk was included in the evaluation process.

The capital asset pricing model of William Sharpe (1964).The attraction of capital asset pricingmodel was that it offered power predictions about how to measure risk and the relation between

expected return and risk. The literature on mutual fund performance measurement goes back tothe beginning of asset pricing theory, if not further. Since the early formal measures of Jensen(1968), Sharpe (1966), and Treynor (1965), numerous new performance measures have beenproposed.

Treynor(1965) was the first researcher developing a composite measure of portfolioperformance. He measured portfolio risk with beta and calculated portfolio market risk premiumand later on in 1966 Sharpe developed a composite index, Sharpe Ratio, which is similar to theTreynor measure, the only difference being the use of standard deviation instead of beta.

For a completely diversified portfolio, one without any unsystematic risk, the two measuresgives identical rankings because the total variance of the completely diversified portfolio is itssystematic variance. Alternatively, a poorly diversified portfolio could have a high ranking onthe basis of the Treynor performance measure but a much lower ranking on the basis of the Shareperformance measure. Any difference in rank would come directly from a difference indiversification. Jensen's alpha was first used as a measure in the evaluation of mutual fundmanagers by Michael Jensen in the 1970s. The CAPM return is supposed to be 'risk adjusted',which means it takes account of the relative riskiness of the asset. After all, riskier assets willhave higher expected returns than less risky assets. If an asset's return is even higher than the riskadjusted return, that asset is said to have "positive alpha" or "abnormal returns". Investors areconstantly seeking investments that have higher alpha. According to Prof. Dr. Klaus Spremann,Portfolio measurement has not only the goal to inform about the quality of a portfolioperformance__ but and thats even more important__ to decompose and analyze the successfactors of a portfolio. Eugene Fama (1972) developed a decomposition of portfolio performancethat extends beta-based differential return analysis to extract the components of return that arebased on risk management and those based on selectivity.The basic premises for Famas technique is that overall performance of a portfolio, which is itsreturn in excess of the risk-free rate, can be decomposed into measures of risk-taking andsecurity selection skill. Theselectivity component represents the portion of the portfolios actualreturn beyond that available to an unmanaged portfolio with identical systematic risk. Thus this


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selectivity measure is used to assess the managers investment competency. Portfolioperformance evaluation focuses on the aggregate return and risks generated by an activeportfolio. The evaluation involves comparing the active portfolio to peer group of activeportfolios or to variously specified nave portfolios. It is also desirable to identify the addedvalue of various strategies within the portfolio. Exploring performance within a portfolio is the

realm of attribution analysis. This analysis requires much more information, including thecomposition of the portfolio across time.


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Chapters outline:

3.1 Introduction

3.2 Objectives of ICB3.3. Business Policy3.4. Business Functions

3.5. Continued Operations of ICB3.6. Subsidiary Companies of ICB

3.7 Chapters Conclusion

Chapter-3: An overview of ICB


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3.1. IntroductionInvestment Corporation of Bangladesh (ICB) is an investment bank established to accelerate thepace of industrialization and develop a sound securities market in Bangladesh. It was establishedin 1976 with the objective of encouraging and broadening the base of industrial investment. ICBunderwrites issues of securities, provides substantial bridge financing programs, and maintains

investment accounts, floats and manages closed-end and open-end mutual funds and closed-endunit funds to ensure supply of securities as well as generating demand for securities. ICB alsooperates in both Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) as dealer.The Investment Corporation of Bangladesh (ICB) was established on 1 October 1976 under "TheInvestment Corporation of Bangladesh Ordinance, 1976" (No. XL of 1976). The establishmentof ICB was a major step in a series of measures undertaken by the Government to accelerate thepace of industrialization and to develop a well-organized and vibrant capital market inBangladesh. It caters to the need of institutional support to meet the equity gap of the companies.In view of the national policy of increasing the rate of savings and investment to promote self-reliant economy, ICB assumes an indispensable and pivotal role. Initially, the activities of ICBwere limited to underwriting public issue of shares, bridge financing, debenture financing and

opening/maintaining investors' accounts (Investors' Scheme). ICB had largely expanded its areasand scope of activities and now provides various types of investment and banking services.Added activities include providing debenture loans to companies and loans to investors onmargin trading basis, providing advances against ICB unit certificates, leasing of industrialequipment, managing unit fund and mutual funds, and participating in stock exchange for tradingsecurities.

3.2. Objectives of ICB To encourage and broaden the base of investment To develop the capital market To provide for matters ancillary thereto To mobilize savings To promote and establish subsidiaries for business development

3.3. Business Policy To act on commercial consideration with due regard to the interest of industry, commerce, depositors, investors and to the public in general To provide financial assistance to projects subject to their economic and commercial

viability To arrange consortium of financial institutions including merchant banks to provide

equity support to projects and thereby spread the risk of underwriting. To develop and encourage entrepreneurs To diversify investments To induce small and medium savers for investment in securities To create employment opportunities

3.4. Basic Functions Underwriting of initial public offering of shares and debentures Underwriting of right issue of shares Direct purchase of shares and debentures including placement and equity participation


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Providing lease finance to industrial machinery and other equipment singly or by forming syndicate Managing investors' Accounts Managing Open End and Closed End Mutual Funds Operating on the Stock Exchanges

Providing investment counsel to issuers and investors Participating in Government divestment Program Participating in and financing of joint-venture projects

Dealing in other matters related to capital market operations Conducting Computer training programs Providing advance against ICB Unit and Mutual Fund certificates To act as trustee and custodian Providing Bank guarantee Providing consumer credit Introducing new business products suiting market demand To supervise and control the activities of the subsidiary companies

3.5. Continued Operations of ICB

3.5.1 Portfolio Management

Portfolio management is one of the prime functions of ICB. Being a leading institutionalinvestor, ICB contributes significantly to the development of the country's capital market throughactive portfolio management. As on 30 June 2009, the market value of the securities of ICB'sinvestment portfolio stood at Tk. 13,696.90 million.

3.5.2. Project Loan AppraisalAppraisal, sanction, disbursement and recovery of project loans approved by the topmanagement are one of major operating activities of ICB. Financing the development ofindustrialization is one of the key objectives behind the formation of ICB. Up to 30 June 2009ICB has financed 308 projects involving Tk. 1145.20 million.

3.5.3. Private PlacementsICB is authorized to act as an agent of the issuers and investors for private placements ofsecurities. Under this arrangement, ICB places securities to individuals/institutions on behalf ofthe issuer for which it charges fees. ICB also acquires shares/securities for its own portfolio bothin pre-IPO placement and equity investment.

3.5.4. Trustee, Custodian and Banker to the IssuesTo act as the custodian to the public issue of open-end and closed-end Mutual Funds ICBprovides professional services. It also acts as the Banker to the issues and provides similarservices through the network of its branches. Fees in this regard are negotiable. ICB is acting astrustee to the debenture issues and asset-backed securitized bonds. Up to 30 June, 2009 ICB


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acted as trustee to the debenture issues of 17 companies, issues of 9 bonds of 6 companies andmanager to the public issues of 41 companies. It also undertook the responsibilities of trustee aswell as custodian to 9 closed-end and 2 open-end mutual funds.

3.5.5. Securities Trading

ICB Securities Trading Company Ltd. actively participates in the trading activities of securitieson both the bourses as member. Over the years, ICB has been one of the largest traders on theexchange. ICBs investors scheme and the Mutual Fund/Unit Fund not only mobilize

individuals savings but are also the source of demand for and supply of securities in the stockmarket.

3.5.6. Investors Scheme

The Investors' Scheme was introduced in 1977 with the objective of broadening the base ofequity investment through mobilizing savings of small and medium size savers for investment inthe securities market. In addition to Head Office, Investment Accounts are also operated at the 7branch offices of ICB located at Dhaka, Chittagong, Rajshahi, Khulna, Barisal, Sylhet, and

Bogra. However in view of strategic changes in policy reform, from 01 July 2002 ICB CapitalManagement Ltd.' started opening and managing investment accounts. ICB will continue toprovide services to its existing accounts only.

3.5.7. Venture Capital FinancingAs part of business diversification and to encourage rapid industrialization of non-traditional,risky but potential industries in the country ICB has launched Venture Capital Financing Schemein the year 2008-2009.

3.5.8. Lease Financing

ICB Provides lease finance mainly for procurement of industrial machinery, equipment andtransport. ICB provides professional advice and financial assistance to the intending clients. Theperiod of lease, rental, charges, and other terms and conditions are determined on the basis oftype of assets and the extent of assistance required by the applicants. Lease financing scheme ofICB started in 1999.

3.5.9. Advance against Unit/Mutual Fund Certificates SchemeAdvance against ICB Unit Certificates Scheme was introduced in 1998, especially designed forthe ICB unit- holders to meet their emergency fund requirements. One can borrow maximum Tk.85 per unit by depositing his/her unit certificates under lien arrangement from any of the ICBoffices where from such unit certificates were issued.Advance against ICB Mutual Fund certificates Scheme was introduced in 2003, designed for theICB Mutual Fund Certificate-holders to meet their emergency fund requirement. One can borrowmaximum of 50% value of last one year's weighted average market price of certificates at thetime of borrowing by depositing his/her certificates under lien arrangement from any of the ICBoffices.


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3.5.10. Consumer Credit SchemeAs part of business diversification program, ICB has introduced "Consumers Credit Scheme" in2003-04 considering at the need of various household commodities of different employees ofGovt., semi-govt., autonomous bodies and some established private sector organizations. Underthis scheme one can enjoy minimum Tk. 1.0 lac but maximum Tk. 5.0 lac credit facilities. The

rate of interest on the loan is reasonable and competitive which is fixed by the board of directorsof ICB considering the bank rate and with the guidelines of Bangladesh Bank.

3.5.11. Bank Guarantee schemeICB introduced Bank Guarantee scheme in 2002-03. ICB provides (i) Bid Bond for enabling thebusiness people to participate in any tender or bidding; (ii) Performance Bond for helping thebusiness community to continue their business smoothly by fulfilling their obligations promisedby them to their clients; and (iii) Customs Guarantee for solving different disagreements betweenthe customs authority and the business classes at the initial stage. The maximum limit ofguarantee is Tk. 20.00 million and would be issued against at least 20% cash and 80% easilycashable securities or against 100% cash margin. Re-guarantee from other financial institution is

required for guarantee against the amount exceeding Tk. 20.00 million.

3.5.12. Mergers and AcquisitionsCompanies willing to expand their business through mergers or acquisitions or to Divest projectsthat no longer viable into present capacity of operation can contact the Corporation. ICBprovides professional services and advices in respect of shaping up the cost and financialstructures to ensure best possible operational results. Besides, in case of divestment, thecorporation, through network and established business relationship, bring buyers and sellerstogether, help them to negotiate final agreement and advice on the emerging corporate structure.

3.5.13. Equity and Entrepreneurship Fund (EEF)The Government of Bangladesh had set up an Equity Development Fund (EDF) in the budget2000-2001 known as Equity and Entrepreneurship Fund (EEF) with a view to encouraging theinvestors to invest in the rather risky but promising two sectors, namely, software industry andfood-processing/agro-based industry. Initially the management of the fund was vested toBangladesh Bank. Subsequently a sub agency was signed between ICB and Bangladesh Bank on1 June 2009. According to this agreement, the management of the fund has been entrusted onICB.

3.6. Subsidiary Companies of ICB

As a component of the restructuring program of ICB under Capital Market DevelopmentProgram (CMDP) initiated by the Government of Bangladesh (GOB) and the AsianDevelopment Bank (ADB) and in terms of power conferred in the ICB Ordinance threesubsidiary companies namely (i) ICB Capital Management Limited, (ii) ICB Asset ManagementCompany Limited; and (iii) ICB Securities Trading Company Limited have been created andmade operational to carry out merchant banking, mutual fund operations and stock brokeragefunctions respectively.Three subsidiary companies are being operated by their own memorandum and articles ofassociations, Companies Act, 1994, SECs Rules and Regulations and other applicable laws. Thecompanies have independent Board of Directors and separate management. As per provision of


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ICB Ordinance (amended), ICB ceased to undertake new business in the respective areas fromthe dates the subsidiary companies became operative. It shows in exhibit-3.1:

Source: Annual report of ICB Asset Management Company 2009-2010

3.6.1. ICB Asset Management Company Limited (IAMCL)IAMCL was incorporated as a public limited company with an authorized capital of Tk. 1000million and a nominal paid up capital of Tk. 20.00 million, which was subsequently increased toTk. 75.00 million, under the Companies Act, 1994 with the Registrar of Joint Stock Companiesand Firms on 5 December 2000. The Company obtained license on 14 October 2001 from theSecurities and Exchange Commission (SEC) under Securities and Exchange Commission(Mutual Fund) Rules, 2001 to carry out the mutual fund activities. The company is engaged in

investment management; more specifically floating and managing both open-end and closed endmutual funds, provident funds etc. The company is dedicated towards development of mutualfund industry as well as the capital market of Bangladesh. ICB Asset Management CompanyLtd. has so far floated 8 (six) closed-end mutual funds and 2 (two) open-end mutual Fundsthrough which the small and medium savers get opportunities to invest their savings in abalanced and relatively low risk portfolio.

3.6.2. ICB Capital Management Limited (ICML)ICML is a fully owned subsidiary of Investment Corporation of Bangladesh. The companyobtained license from the Securities and Exchange Commission to act as Issue Manager,Underwriter, and Portfolio Manager and to carry out other merchant banking operations underthe Securities and Exchange Commission (Merchant Banker and Portfolio Manager)Regulations, 1996. The company was incorporated under the Companies Act, 1994 on 5December 2000 and obtained registration from the Securities & Exchange Commission on 16October 2001. The company started its' operation from 01 July, 2002 upon issuance of gazettenotification by the government. The Company has a separate Board of Directors comprising 3members from the private sector having good academic qualification, expertise and experience inthe field of business, finance and investment.


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Key activities of ICML are given below:

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

3.6.3. ICB Securities Trading Company Limited (ISTCL)

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

3.7. ConclusionIn this chapter, I have discussed about ICBs basic functions, its subsidiary companies, policies.

objectives. In the next chapter, some discussions about mutual funds are shown.


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Chapters outline:

Chapter Outline

4.1. Introduction4.2. Types of Investment Companies4.3. Investment Objectives of Mutual Funds

4.4. Advantages of Mutual Funds4.5. Mutual Funds in Bangladesh

4.6. ICB Mutual Funds4.7 Chapters conclusion

Chapter-4: About Mutual funds Of

ICB


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4.1. IntroductionMutual funds are investment companies that own large, diversified portfolios of securities(mainly stocks, bonds and derivatives) selected by skilled securities analysts (with the exceptionof index mutual funds), purchased with money raised by selling shares of the mutual funds toinvestors and managed by highly qualified investment professionals.

4.2. Classification of Investment CompaniesThere are three types of investment companies: open-end funds, closed-end funds and unit trusts.

4.2.1 Open-End FundsAn open-end fund is a collective investment scheme which can issue and redeem shares at anytime. An investor will generally purchase shares in the fund directly from the fund itself ratherthan from the existing shareholders. This type of mutual fund does not have restrictions on theamount of shares the fund will issue. If demand is high enough, the fund will continue to issueshares no matter how many investors there are. Open-end funds also buy back shares wheninvestors wish to sell. Globally, the majority of mutual funds are open-end. By continuously

selling and buying back fund shares, these funds provide investors with a very useful andconvenient investing vehicle.

The main characteristics of open-end fund: Liquidity: Anytime the issuer is ready to purchase the securities from holders. Price: the net asset value (NAV) of a mutual fund indicated the value per share. Price

normally depends on bid and asked price. Price determined by following formula-

NAV= (Market Value-Liabilities)/ No. of share outstanding

Charges:Load Fund: The sales commission is referred to as a load. A mutual fund

imposing sales commission is called load fund.

No-load fund: A mutual fund that does not impose a sales commission is called a

no-load fund.

Back-end load fund: A fund does not charge a commission for share purchase, itmay still charge investors a fee to sell (redeem) shares. Such fund referred to as back-endload funds.

12 b-1 fee: Fee charged by some mutual funds to cover promotion, distributions,marketing expenses, and sometimes commissions to brokers.

4.2.2 Closed-End FundsA closed-end fund is a publicly traded investment company that raises a fixed amount of capitalthrough an initial public offering (IPO). The fund is then structured, listed and traded like a stockon a stock exchange. It raises a prescribed amount of capital only once through an IPO by issuinga fixed amount of shares, which are purchased by investors in the closed-end fund as stock.Unlike regular stocks, closed-end fund stock represents an interest in a specialized portfolio of


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securities that is actively managed by an investment advisor and which typically concentrates ona specific industry, geographic market, or sector. The NAV of closed-end funds is calculated inthe same way as for open-end funds. However, the stock prices of a closed-end fund fluctuateaccording to market forces (supply and demand) as well as the changing values of the securitiesin the fund's holdings.

4.2.3 Unit TrustsUnit trust is a registered investment company which purchases a fixed, unmanaged portfolio ofincome producing securities and then sells shares in the trust to investors. Unit trusts typicallyinvest in bonds. They differ in several ways from both open-end and closed-end mutual fundsthat specialize in bonds. First, there is no active trading of the bonds in the portfolio of the unittrust. Second, unlike open-end and closed-end mutual fund investor, the unit trust investor knowsthat the portfolio consists of a specific portfolio of bonds and has no concern that the trustee willalter the portfolio.

4.3. Investment Objectives of Mutual Funds

Generally, portfolio managers divide up their investment objectives into nine differentapproaches, which are categorized by three company sizes (large cap, mid cap and small cap)and three investing styles (value, growth and blend). In the case of the former, size is determinedby a company's market capitalization, commonly referred to as market cap. Assets or the numberof employees are not the logical measurements of company size for investment business.

4.4. Advantages of Mutual Fund

Mutual Fund substantially lowers the investment risk of retail investors throughdiversification in which funds are spread out into various sectors, companies, securities aswell as entirely different market.

The investors save a great deal in transaction costs given that s/he has access to a largenumber of securities by purchasing a single share of a Mutual Fund.

Mutual Fund mobilizes the savings of small investor and channels them into lucrativeinvestment opportunities. As a result, Mutual Fund adds liquidity to the market.

Mutual Fund provides the small investors access to the whole market that at an individuallevel, would be difficult if not impossible to achieve.

Because funds are professionally managed, investors are relieved from the emotionalstrain associated with the day-to-day management of the fund.

Mutual Fund is one of the most strictly regulated investment vehicles. The lawsgoverning Mutual Fund require exhaustive disclosure to the SEC as well as the generalpublic. The laws also entail continuous regulations of fund operations by the Trustee.

4.5. Mutual Funds in BangladeshThe mutual fund industry in Bangladesh is at its early or nascent stages, offering room forgreater growth and product innovation. Elsewhere in the world, Mutual Funds have proved to besafe intermediately in capital and money market. Safety of funds, disposal of risks and asatisfactory yield are the hallmarks of Mutual Funds. In Bangladesh ICB is the harbinger ofMutual Funds. Out of the total 27 (twenty seven) Mutual Funds, ICB and its Subsidiary have sofar floated 20 (twenty) Mutual Funds in the Market.


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Mutual Funds contribution is bigger than other securities in developed countries. Thecontribution of the existing Mutual Funds in terms of the local stock market capitalization isaround 3%, which is more than 50% in many developed countries such as US and Europe. Inneighboring India, the figure is 24 percent, such a market capitalization not more than 10 percentfor Pakistan, a relatively weaker economy. The combined issued capital of the mutual funds

listed in our burses is worth $ 45 million or Tk 3116 million and their market capitalization isonly $ 230 million or Tk 15841 million. (The Fianancial Express, 2009)

4.5.1. Challenges for Mutual Fund Growth in BangladeshAnalysts pointed out that the market capitalization of Dhaka Stock Exchange increased byalmost 10 times in the last 10 years riding on the growing demand by investors. But the numberof mutual funds did not grow to that extent, mainly because of poor knowledge and the dearth ofprofessionals. Educating investors is also a big challenge for any asset management company.Insufficient number of trustees and custodians are other major challenges for the smoothfloatation of mutual funds.

4.5.2. Growth Potential of Mutual Fund SectorDespite the challenges, there are huge opportunities to develop this sector. A recent studyindicates that Bangladesh's mutual fund sector has every possibility to grow at 40 percent a yearin the next five years. RACE Management, a second generation asset management company whoconducted the study, forecasts a Tk 10,000 crore growth for 2015, in terms of assets. The second-generation asset management firms that have been awarded licenses in two years 2008 and 2009are Prime Finance, VIPB, LR Global and RACE. Earlier, there were only two such companiesInvestment Corporation of Bangladesh (ICB), a state-run organization, and AIMS Bangladesh, aprivately owned one. The government-owned Bangladesh Shilpa Rin Sangstha (BSRS) nowBangladesh Development Bank Ltd. (BDBL), which has an asset management wing, is indormancy.

Exhibit-4.1, source: ICB, viewed 26nd October 2011, Available

fromhttp://www.icb.gov.bd/mutual_fund.php

The RACE Management has a plan to launch Tk 725 crore mutual funds. AIMS, a first-generation company, will also come up with Tk 700 crore mutual funds. Two big close-endmutual funds worth Tk 8.0 billion will hit the country's stock markets this year to increase thedepth of the market. The mutual funds will be floated through joint initiatives of a number offinancial institutions for the first time in Bangladesh. The 'LR Global Bangladesh Mutual FundOne' worth Tk 3.0 billion is expected to make debut and another mutual fund valued at Tk 5.0billion by this year-end in the bourses. (Rahman, 2009)
http://www.icb.gov.bd/mutual_fund.phphttp://www.icb.gov.bd/mutual_fund.phphttp://www.icb.gov.bd/mutual_fund.php


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4.5.3. Regulatory Framework for Mutual Fund in BangladeshThe formation and operation of Mutual Fund in Bangladesh is constituted in the form of a Trustmade by virtue of Deed of Trust in accordance with the provisions of Trust Act, 1882 (Act II of1882) and under the provisions of the Securities and Exchange Commission (Mutual Fund)Rules, 2001. This instrument of trust has to be registered under the provisions of the Registration

Act, 1908 (Act No. XVI of 1908). The mutual fund may have various schemes of different size,tenure (not more than 10 years for closed-end mutual fund) and characteristics and may beclosed or open-ended.

The salient provisions for the formation and operation of Mutual Fund under the Securities andExchange Commission (Mutual Fund) Rules, 2001 are discussed in brief in the followingsubsections.

a) Main Features of a Mutual Fund- Tenure of a closed-end mutual fund must not more than 10 years.- Individuals as well as the institutional investors are eligible for investment in the Fund.

- The Asset Management Company has to pay all registration and other fees as payable tothe Commission or any other agencies.- The sponsor has to provide at least ten percent of the minimum size of a scheme to themutual fund.- The Funds are not allowed to borrow to finance its investments, as long as it is notpermissible under the rules.

b) Rights, Duties and Obligation of the Parties of the FundThe Sponsors

- The Sponsor is the main party to constitute the mutual fund by virtue of Trust Deed.- The Sponsor appoints the Trustee of the Mutual Fund, who holds the property of theFund in trust for the benefit of the unit holders of the schemes in accordance with therules.- The Sponsor appoints the Custodian, who shall provide custodian service to the Fund inaccordance with the rules.- The Sponsor appoints the Asset Management Company, who shall manage the mutualfund for the benefit of the Fund and the unit holders of the Fund in accordance with therules.- The Sponsor is prohibited from participating in any decision making process for anyinvestments by the different schemes of the Mutual Fund.

The Trustee

- The Trustee is the guardian of the Fund holds all capital assets of the Fund in trust forthe benefit of the unit holders, in accordance with the rules. The Trustee is bound to act inthe best interest of the unit holders.

- The Trustee is responsible to take all reasonable care to ensure that the schemes of themutual fund floated and managed by the Asset Management Company are in accordancewith the Trust Deed and the SEC (Merchant Bank) Rules, 2001.


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- The Trustee preserves the right to call for any books of accounts, records, documentsand such other information as considered necessary from the Asset ManagementCompany as is relevant to the management of the affairs concerning the operation of theschemes of the Mutual Fund.

- The Trustee has the powers to initiate the process of termination of the appointment ofthe Asset Management Company under specific events of violation of the Trust Deed,Investment Management Agreement and/or provisions of the Rules only, subject to priorapproval of the Commission, in accordance with the provisions of the Rules.

- The Trustee is prohibited from the participation in any decision making process forinvestments of the Fund and its various schemes.

- The Trustee is empowered to appoint auditors for the various schemes of the mutualfund who must not be the auditors of the Trustee and/or the Asset Management Companyand should regularly monitor the performance and activities of the auditors.

- The Trustee will be paid an annual Trusteeship Fee of as percentage of the Net AssetValue (NAV) of the Fund on semi-annual in advance basis during the life of theparticular scheme or as may be agreed upon between the parties.

- The Trustee cannot be removed without the prior approval of the Commission and mustnot retire until such time a new Trustee takes over under due process as laid down in theRules.

- The Trustee is obligated to maintain full and unconditional confidentiality of anyinformation received from the Asset Management Company and as well as on the Fund.

The Asset Management Company- The Asset Management Company is responsible for designing, structuring, registering,promoting, issue & public floatation, investment operation and management of theschemes of the mutual fund in accordance with the provisions of the Trust Deed and theRules.

- The Asset Management Company is responsible to take initiative to facilitate electronicsettlement of certificates of the Fund with the CDBL.

- The Asset Management Company is appointed take all reasonable steps and exercise alldue diligence to ensure that the investment of the schemes of the Fund is not contrary tothe provisions of the Trust Deed, the Investment Management Agreement and the Rules.

- The Asset Management Company is prohibited to act as a Trustee of any mutual fund orto undertake any similar business activities without prior approval of the SEC, which mayadversely affect the interest of the Fund.


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- The Asset Management Company is obligated to submit to the Trustee and theCommission quarterly activity and compliance reports on March 31, June 30, September30 and December 31 within fifteen days of the end of the quarter or at such intervals asmay be required by the Trustee or the SEC.

- The Asset Management Company prepares and distributes prospectuses, annual andperiodical reports of the Fund and shall maintain all sorts of communications withinvestor and other stakeholders as per the Rules and shall undertake advertising and otherpromotional activities.

- The Asset Management Company needs to furnish all the relevant information anddocuments to the CDBL as may be required under the Depository Act, 1999 andDepository Rules, 2000.

- The Asset Management Company may appoint any Distributor or Agent, includingBanker to the Issue, and stock-broker or merchant banker at reasonable and competitive

market based fees and commission for the promotion, distribution and/or subscription ofthe units of the schemes of the Fund.

The Custodian

-Duty of the Custodian is to keep liaison with the CDBL and collect and preserveinformation required for ascertaining the movement of securities of the Fund.

- The Custodian in charge to keep the securities of the Fund in safe and separate custodyand must provide highest security for the assets of the Fund.

4.6. ICB Mutual FundsIn Bangladesh ICB has pioneered Mutual Funds for the sake of investors and of the capitalmarket. ICB Mutual Funds are independent of one another. ICB Mutual Funds being listed aretraded on the Dhaka and Chittagong Stock Exchange. Price of Mutual Fund certificates after IPOis determined on the Stock Exchanges through interaction of supply and demand. The marketprice of a Mutual Fund certificates is available in Stock exchange quotations and in newspapers.Countrys first mutual fund, the First ICB Mutual Fund was launched on 25 April 1980. Sincethen ICB had floated 8 mutual funds up to 1996. One of the three subsidiary companies, namely:ICB Asset management Ltd. formed under the capital market development program, started itsbusiness from 1 July 2002 to perform mutual fund management activities. Under reform programICB discontinued new business of mutual fund operation. However, business in mutual fundswhich were undertaken before commencement of the subsidiary company is being managed byICB. All the ICB mutual funds are closed-end fund except ICB Unit Fund. ICB Unit Fund is anopen-end mutual fund.


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

Source: ICB, viewed 24nd October 2011, Available from:http://www.icb.gov.bd/sub_comp.php

4.6.2. Assets of ICB Mutual FundsICB Mutual Funds Certificates holders shall have unfettered ownership in the assets of the Fundto which they are related. In case of winding up of the Corporation the assets belonging to anyICB Mutual Fund shall not be treated as the assets of the Corporation.

4.6.3. Management Fee and Charges

At present management fee @ 1% on the paid up capital of the Fund is charged annually. Noamount is charged on account of custodial and trust services. Parts of operating expenses arecharged to the respective Mutual Funds on pro rata
http://www.icb.gov.bd/sub_comp.phphttp://www.icb.gov.bd/sub_comp.phphttp://www.icb.gov.bd/sub_comp.phphttp://www.icb.gov.bd/sub_comp.php


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4.6.4. ICB Mutual Funds at a Glance: The financial activities of ICB mutual funds for 2001 to2010 are shown in the exhibit: 4.2 and 4.3

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

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


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


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4.6.5. Declaration of Dividends

The net income received on investments of Funds on account of dividend, bonus, interest, capitalgain etc. are distributed amongst the Certificate Holders as per decision of the Board of Directorsof ICB. Board declares such income in the form of dividend at the end of July each year. The

Board of Directors of the Investment Corporation of Bangladesh in its meeting held on 30 July,2011 approved Dividends on ICB Mutual Funds for the year 2010-2011 as follows exhibit 4.4:

Sl No Name of FundDividend Per Certificate of

(Tk.) 100.00 each

A. (01) First ICB Mutual Fund 500.00

(02) Second ICB Mutual Fund 250.00

(03) Third ICB Mutual Fund 185.00

(04) Fourth ICB Mutual Fund 165.00

(05) Fifth ICB Mutual Fund 135.00

(06) Sixth ICB Mutual Fund 90.00

(07)Seventh ICB MutualFund

95.00

(08) Eighth ICB Mutual Fund 90.00

B. (01)ICB Unit Fund(TK. PerCertificate.)

30.00


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

4.6.6. Tax Concessions(a) Investment in Certificates provides the same tax exemptions as an investment qualifyingunder Section 44 of the Income Tax Ordinance, 1984.(b) Capital gains received on investment in the Fund Certificates shall not be included in the totalincome of a Certificate holder within the limits specified in the Income Tax Ordinance, 1984.10(c) Dividends received on investment in the Fund will be treated as dividend income underIncome Tax Act, and will be exempted from tax with the limits specified in the Act.

(d) The Fund incomes are to be exempted from all taxes as granted by the Government.

4.6.7. ICB Unit Fund

ICB Unit Fund was established on April 10, 1981. Its main objective is to mobilize savingsthrough sale of its units to small investors and invest these funds in marketable securities. Thescheme provides a potential source of equity and debt to industrial and commercial concerns andthus contributes to the industrial development of the country. Unit fund is an open ended MutualFund. It provides an opportunity to the unit holders to invest their funds in a well-managed and
http://www.icb.gov.bd/zindex.phphttp://www.icb.gov.bd/zindex.phphttp://www.icb.gov.bd/zindex.php


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diversified portfolio with a high degree of security of capital and reasonable yearly returns. ICBunits are securities within the meaning of Trust Act. 1882. After commencement of ICB AssetManagement Company Ltd. from 1 July 2002 ICB has stopped sale of unit certificates undercumulative investment plan (CIP). The responsibility of managing the fund rests on ICB forwhich management fee @ Tk. 1.25 per Unit (net outstanding) is charged.11 The Corporation also

discharges the responsibility of loading and unloading of securities in and from the portfolio inthe interest of the Unit holders. It is also the custodian of all assets of the fund. Under thisscheme a holder instead of receiving dividend may reinvest such dividend income accrued forpurchasing Unit at a concessional rate. In such case, Units are issued at Tk. 1.00 less than theopening price of the financial year. The total income earned on investment/ deployment of funds,net of expenditures incurred, in a financial year is distributed among the unit holders as dividend.Dividend is normally declared at the end of July each year by the Board of Directors of ICB.Dividend Warrants are dispatched soon after declaration of dividend.

4.7 ConclusionIn this chapter, an overview of Mutual Funds in Bangladesh as well as Mutual Funds of ICB are

shown. Different activities and history of ICB Mutual Funds of ICB have also been discussed. Inthe next chapter the performance of these Mutual funds have been shown


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Chapter Outline:

5.1 Introduction5.2. SWOT Analysis

5.3. Quantitative Analysis5.4 Composite Portfolio Performance Measures

5.5 T-test of ICBMFs5.6 Conclusion

Chapter-5: Performance

Analysisof ICBMutual Funds


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5.1. IntroductionThis chapter includes both qualitative and quantitative analysis of ICB Mutual Funds. Inqualitative analysis I have discussed SWOT analysis and in quantitative analysis I haveevaluated mutual funds from different view. These are as follows:

5.2. SWOT AnalysisSWOT analysis is the detailed study of an organization's exposure and potential in perspective ofits Strengths, Weaknesses, Opportunities and Threats. This facilitates the organization to maketheir existing line of performance and also foresee the future to improve their performance incomparison to their competitors. As though this tool, an organization can also study its currentposition, it can also be considered as an important tool for making changes in the strategicmanagement of the organization.

5.2.1. Strengths of ICB Mutual Funds:

Secured investment option Certain dividend payment

Broad market coverage R&D Skills and leadership Human resource competencies Ability to manage strategic change Portfolio management skills Strong financial backup Expert management team Strong network Advance against ICB Mutual Fund certificates Scheme

5.2.2. Weaknesses of ICB Mutual Funds Inadequate information systems Floating of new mutual fund is stopped Declining in R&D innovation Growth without direction High conflict and politics Bureaucratic practice Lack of Discipline Most of the employee are inactive

5.2.3. Opportunities Potential environmental opportunities Diversify into new growth business Reduce rivalry among competitors Government tries boost up capital market Investors are getting confidence over security market

5.2.4. Threats

Increases in private substitute competitor No promotional and attractive offer for investors


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Increase in foreign competition People have less knowledge about the capital market There are some unethical practices in security market

5.3. Quantitative Analysis

5.3.1. Return AnalysisAverage mutual fund returns can be computed as an arithmetic mean or a geometric mean, andthere are reasons for using both.

Return - Arithmetic MeanAnalyst and portfolio manager often want one number that describes the representative possibleoutcome of an investment decision. The arithmetic mean is by far the most frequently usedmeasure of portfolio return for mutual funds. The arithmetic mean of annual returns is simply amutual fund's average annual return. It tells how well a fund performed over any particularperiod of time. ArithmeticThe Arithmetic Mean Returns of ICB Mutual Funds and DGEN and DSE20 are given in the followingExhibit:

Name Monthly Return Annualized Return

(1stICBMF) 2.21403% 26.56835%

(2ndICBMF) 2.52152% 30.25822%

(3rdICBMF) 2.17044% 26.04529%

(4thICBMF) 2.11767% 25.41208%

(5thICBMF) 2.29275% 27.51301%

(6thICBMF) 2.43155% 29.17866%

(7thICBMF) 2.33542% 28.02501%

(8thICBMF) 1.93964% 23.27573%

(DGEN) 1.78758% 21.45101%

(DSE20) 0.98109% 11.77308%

Table -5.1: Monthly and Annualized returns of ICBMF and DSEGEN and DSE20

The monthly arithmetic mean of the ICB mutual funds are calculated based on the 120 monthlyreturns (July 2001 to June 2011). The Annualized returns show that all the mutual funds out -perform the market return. The return of the 2th ICB M. F. is the highest among all.

5.3.2. Risk AnalysisEvery type of investment, including mutual funds, involves risk. Risk refers to the possibilitylosing money (both principal and any earnings) or fails to make money on an investment. Afund's investment objective and its holdings are influential factors in determining how risky afund is. Here Standard Deviation, Beta, R-squared and Coefficient of Variation have beenused to measure the risk of the ICB Mutual Funds. These statistical measures are historicalpredictors of investment risk/volatility and are all major components of modern portfolio theory


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(MPT). The MPT is a standard financial and academic methodology used for assessing theperformance of equity, fixed-income and mutual fund investments by comparing them to marketbenchmarks.

a) Standard Deviations

Standard deviation measures the dispersion of data from its mean. In plain language, the morethat data is spread apart, the higher the difference is from the norm. In finance, standarddeviation is applied to the annual rate of return of an investment to measure its volatility (risk). Avolatile stock would have a high standard deviation. With mutual funds, the standard deviationtells us how much the return on a fund is deviating from the expected returns based on itshistorical performance. The Standard

Name Standard deviation

(1stICBMF) 8.04057%

(2ndICBMF) 11.82338%

(3rdICBMF) 9.58516%

(4thICBMF) 9.49731%

(5thICBMF) 11.99240%

(6thICBMF) 27.45455%

(7thICBMF) 14.00039%

(8thICBMF) 12.22781%

(DGEN) 8.13752%

(DSE20) 7.67989%

Table -5.2: Standard deviation of ICBMF, DSEGEN and DSE20

The monthly standard deviation of the return from the ICB mutual funds are calculated based onthe 12 monthly returns (July 2001 to June 2011). Total risk of the every mutual fund is higherthan that of the market. Sixth ICB Mutual Fund has experienced the highest risk (27.45455%)according to the standard deviation of returns.

b) Beta CoefficientsBeta, also known as the "beta coefficient," is a measure of the volatility, or systematic risk, of asecurity or a portfolio in comparison to the market as a whole. Beta is calculated using regressionanalysis, and consider as the tendency of an investment's return to respond to swings in themarket. By definition, the market has a beta of 1.0. Individual security and portfolio values aremeasured according to how they deviate from the market. A beta of 1.0 indicates that the

investment's price will move in lock-step with the market. A beta of less than 1.0 indicates thatthe investment will be less volatile than the market, and, correspondingly, a beta of more than 1.0indicates that the investment's price will be more volatile than the market. Betas for the EightMutual Funds of ICB are determined using the following formula:

equation-5.1


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Where:Cov( p m) = covariance between individual mutual funds return and market returnVarm= variance of the market return.

The beta coefficients for the ICB Mutual Funds from 1st ICB to 8th ICB are given in thefollowing Exhibit:

Name Beta

(1stICBMF) 0.290333469

(2ndICBMF) 0.353755095

(3rdICBMF) 0.257675094

(4thICBMF) 0.336138189

(5thICBMF) 0.415684339

(6thICBMF) 0.529488738

(7thICBMF) 0.254526598

(8thICBMF) 0.452061627

DSEGEN 1

Table -5.3: Beta of ICBMF and DSEGEN

The beta coefficients of the ICB mutual funds are well below in comparison to the market. Thecalculated betas of the funds indicate low biasness to the market. This beta estimation can beaffected by the problem of beta estimation in case of infrequently traded stocks. This is a special

problem in small security markets like ours. The beta estimation for thinly traded shares isbeyond the scope of this report. So, all the composite portfolio analysis is performed using theabove beta coefficients.

c) R-squaredR-Squared is a statistical measure that represents the percentage of a fund portfolio's or security'smovements that can be explained by movements in a benchmark index. Here I consider the DSEGeneral Index as the benchmark index for ICB Mutual Funds. R-squared values range from 0 to100. A mutual fund with an R-squared value between 85 and 100 has a performance record thatis closely correlated to the index. A fund rated 70 or less would not perform like the index. R-squared values for the Eight.

Mutual Funds of ICB are determined using the following formula:

..equation-5.2


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The values of R-squared for ICB Mutual Funds are given in the following Exhibit:

Name R-squared

(1stICBMF) 8.63385%

(2ndICBMF)5.92798%

(3rdICBMF) 4.78553%

(4thICBMF) 8.29504%

(5thICBMF) 7.95608%

(6thICBMF) 2.46303%

(7thICBMF) 2.18862%

(8thICBMF) 9.05069%

Table-5.4: R-squared of ICBMF

The results of R-squared measures reveal that the movement of return from ICB mutual fundscannot be explained by the return form the benchmark index. Analysts usually recommendMutual fund investors to avoid actively managed funds with high R-squared ratios, which aregenerally criticized as being "closet" index funds. Here analysts argue that why anyone shouldpay the higher fees for so-called professional management when one can get the same or betterresults from an index fund.

5.4 Composite Portfolio Performance MeasuresAt one time, investors evaluated portfolio performance almost entirely on the basis of the rate ofreturn. They were aware of the concept of risk but did not know how to quantify or measure it,so they could not consider it explicitly. Development in portfolio theory in the early 1960sshowed investors how to quantify and measure risk in terms of the volatility of return. Still,because no single measure combined both return risk, the two factors had to be consideredseparately. Treynor (1965) developed the first composite measure of portfolio that included risk.This section describes in details the three major composite portfolio measures Treynormeasure, Sharpe ratio and Jensen measure that combine risk and return performance into a singlevalue.

5.4.1. Treynor Measures

Jack L. Treynor was the first to provide investors with a composite measure of portfolioperformance that also included risk. Treynor's objective was to find a performance measure thatcould apply to all investors, regardless of their personal risk preferences. He suggested that therewere really two components of risk: the risk produced by fluctuations in the market and the riskarising from the fluctuations of individual securities. Treynor introduced the concept of thesecurity market line, which defines the relationship between portfolio returns and market rates ofreturns, whereby the slope of the line measures the relative volatility between the portfolio andthe market (as represented by beta). The beta coefficient is simply the volatility measure of astock, portfolio or the market itself. The greater the line's slope, the better the risk-returntradeoff.


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Graph-5.5: showing risk-return tradeoff according to Treynor measure

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

..equation-5.3Where:R= the average rate of return for Portfolio i during a specified time period= the average rate of return on a risk-free investment during the time period

i= the slope of the funds characteristics line during that time period

The numerator identifies the risk premium and the denominator corresponds with the risk of theportfolio. The resulting value represents the portfolio's return per unit risk. For evaluating theperformance of the ICB Mutual Funds from 1st ICB to 8th ICB I have taken 364 days T-bill rateas the risk free rate. The 60 month average 364 days T-bill rate is 6.15%. The average rate ofreturn and Beta coefficient of the market and the eight mutual funds are used.


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

Treynor Measure

Yearly

Return

Risk free

Return

Beta T

(1stICBMF) 0.265683513 0.0615 0.290333469 0.703272392

(2ndICBMF) 0.302582185 0.0615 0.353755095 0.681494594

(3rdICBMF) 0.260452948 0.0615 0.257675094 0.772107792

(4thICBMF) 0.254120847 0.0615 0.336138189 0.57304065

(5thICBMF) 0.275130102 0.0615 0.415684339 0.513923864

(6thICBMF) 0.291786564 0.0615 0.529488738 0.434922497

(7thICBMF) 0.280250131 0.0615 0.254526598 0.859439182

(8thICBMF) 0.232757253 0.0615 0.452061627 0.378836077

DSEGEN 0.214510135 0.0615 1 0.153010135

Table-5.6: showing Treynor measure of ICBMF and DSEGEN

According to the measure of Treynor, all the ICB mutual funds have outperformed the market. Amongall the Tryenor Measure for Seventh ICB Mutual Fund is the highest. The ranking of the ICB mutual

fundsare given below in chart:

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

00.10.20.30.40.50.60.70.80.9

T

T


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5.4.2. Sharpe Ratios

The Sharpe ratio or Sharpe index or Sharpe measure or reward-to-variability ratio is a measure ofthe excess return (or Risk Premium) per unit of total risk in an investment asset or a tradingstrategy, named after William F. Sharpe. The Sharpe ratio is almost identical to the Treynor

measure, except that the risk measure is the standard deviation of the portfolio instead ofconsidering only the systematic risk, as represented by beta. The measure followed closely hisearlier work on the capital asset pricing model (CAPM), dealing specifically with the capitalmarket line (CML).

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

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

.equation-5.4

For measuring the performance of the ICB Mutual Funds from 1st ICB to 8th ICB I have taken

364 days T-bill rate as the risk free rate. The 59 month average 364 days T-bill rate is 6.15%.The average rate of return and standard deviation of the market and the eight mutual funds areused.


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

Sharpe Measure

Yearly Return Risk free

Return

Standard

Deviation

S

(1stICBMF) 0.265683513 0.0615 0.080405727 2.539415046

(2ndICBMF) 0.302582185 0.0615 0.118233772 2.0390298

(3rdICBMF) 0.260452948 0.0615 0.095851619 2.075634713

(4thICBMF) 0.254120847 0.0615 0.0949731 2.028162141

(5thICBMF) 0.275130102 0.0615 0.119924001 1.781379038

(6thICBMF) 0.291786564 0.0615 0.274545504 0.83879197

(7thICBMF) 0.280250131 0.0615 0.140003913 1.562457261

(8thICBMF) 0.232757253 0.0615 0.122278139 1.400554954

DSEGEN 0.214510135 0.0615 0.081375206 1.880304123

Table-5.8: showing Sharpe measure of ICBMFs and DSEGEN

According to the measure of Sharpe Ratio the some of the ICB Mutual Funds fail to outperformthe market. Four Mutual FundsOne, two, three and four ICBMF indicate superior risk-adjusted

return. If the ratios are plotted in a graph, all the under performing mutual funds will be belowthe CML line.

Graph-5.9: showing Sharpe measure of ICBMFs and DSE

0

0.51

1.5

2

2.5

3

S

S


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5.4.3. Jensen MeasuresLike the previous performance measures discussed, the Jensen measure is also based on CAPM.Named after its creator, Michael C. Jensen, the Jensen measure calculates the excess return that aportfolio generates over its expected return. This measure is also known as Alpha. Jensens

measure is calculated as:

..equation-5.5Where:Rp = the average rate of return for Portfolio i during a specified time periodRFR = the average rate of return on a risk-free investment during the time periodBp = the slope of the funds characteristics line during that time periodRm = the expected return on the market portfolio of risky assets

The Jensen ratio measures how much of the portfolio's rate of return is attributable to themanager's ability to deliver above-average returns, adjusted for market risk. The higher the ratio,the better the risk-adjusted returns.

For assessing the performance of the ICB Mutual Funds from 1st ICB to 8th ICB I have taken364 days T-bill rate as the risk free rate. The 60 month average 364 days T-bill rate is 6.15%.The average rate of return and Beta coefficient of the market and the eight mutual funds are used.Expected return on the market portfolio of risky assets is calculated based on the average 120monthly return (June 2001 to July 2011) of DSE General Index. Annualized return of the DGENis finally considered as the market return.Here the annualized market return is 21.45%. Jensen Alpha measures of ICB Mutual Funds aregiven in the following Exhibit:

Jensen Measure

DSEGEN(MARKET)

YearlyReturn(ICBMF)

Risk freeReturn

Beta P=Rp-{Rf+(Rm-Rf)*}

(1stICBM

F)

0.214510135 0.265683513 0.0615 0.290333

469

0.15975955

(2ndICB

MF)

0.214510135 0.302582185 0.0615 0.353755

095

0.18695407

(3rdICB

MF)

0.214510135 0.260452948 0.0615 0.257675

094

0.159526047

(4thICB

MF)

0.214510135 0.254120847 0.0615 0.336138

189

0.141188297

(5thICB

MF)

0.214510135 0.275130102 0.0615 0.415684

339

0.150026185

(6thICB

MF)

0.214510135 0.291786564 0.0615 0.529488

738

0.14926942

(7thICB

MF)

0.214510135 0.280250131 0.0615 0.254526

598

0.179804982

(8thICB

MF)

0.214510135 0.232757253 0.0615 0.452061

627

0.102087243


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Table-5.8: showing Jensen Measure of ICBMFsAccording to the measure of Jensens Alpha all the mutual funds of ICB have managed to

generate positive excess return adjusted for market risk. Among all the Second ICB Mutual Fundhas generated the highest alpha (18.69%). According to Jensen measure Second ICB MutualFund is the best performing of and Third ICB Mutual Fund is the worst performing among all the

eight mutual funds managed by ICB.

5.4.3. Famas Decomposition

Following the work of Treynor, Sharpe ad Jensen; Fama (1972) suggested a somewhat finerbreakdown of portfolio performance. The basic premises for Famas technique is that overall

performance of a portfolio, which is its return in excess of the risk-free rate, can be decomposedinto measures of risk taking and security selection skill.

That is, Overall Performance = Excess Return = Portfolio Risk + SelectivityThe selectivity component represents the portion of the portfolios actual return beyond thatavailable to an unmanaged portfolio with identical systematic risk. Thus this selectivity measure

is used to assess the managers investment competency.

Famas Decomposition: RiskRisk is the portion of the excess return that is explained by the portfolio beta and the market riskpremium:

equation-5.6Where:Risk RP= Portion of portfolio excess return due to risk takingBp = the slope of the funds characteristics line during that time periodRm = the expected return on the market portfolio of risky assets

RFR = the average rate of return on a risk-free investment during the time periodHere, the portion of excess returns of the ICB Mutual Funds that can be explained by the mutual fundsbeta and the market risk premium are given in the following Exhibit:

Name Rm Rf p RP risk=

p(Rm-

Rf)

(1stICBMF) 21.45101% 6.15% 0.290333469 4.44240%

(2ndICBMF) 21.45101% 6.15% 0.353755095 5.41281%

(3rdICBMF) 21.45101% 6.15% 0.257675094 3.94269%

(4thICBMF) 21.45101% 6.15% 0.336138189 5.14325%

(5thICBMF) 21.45101% 6.15% 0.415684339 6.36039%

(6thICBMF) 21.45101% 6.15% 0.529488738 8.10171%

(7thICBMF) 21.45101% 6.15% 0.254526598 3.89451%

(8thICBMF) 21.45101% 6.15% 0.452061627 6.91700%

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


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Famas Decomposition: SelectivitySelectivity is the portion of the excess return that is not explained by the portfolio beta and themarket risk premium. Since it cannot be explained by risk, it must be due to superior securityselection.

equation-5.7

Where:

RPSelectivity= Portion of portfolio excess return due to selectivity (superior security selection)

RPTotal=Total excess return of the portfolio; pR RFRBp =the slope of the funds characteristics line during that time period Rm = the expected return on the market portfolio of risky assetsRFR = the average rate of return on a risk-free investment during the time period

Here, the portions of excess returns of the ICB Mutual Funds due to selectivity are given in thefollowing Exhibit:

Selectivity

Name Rp (Annual) Rf( Annual) RP risk= p(Rm-Rf) RP total RP selectivity

1st ICB 26.56835% 6.15% 4.44240% 20.41835% 15.97595%

2nd ICB 30.25822% 6.15% 5.41281% 24.10822% 18.69541%

3rd ICB 26.04529% 6.15% 3.94269% 19.89529% 15.95260%

4th ICB 25.41208% 6.15% 5.14325% 19.26208% 14.11883%

5th ICB 27.51301% 6.15% 6.36039% 21.36301% 15.00262%

6th ICB 29.17866% 6.15% 8.10171% 23.02866% 14.92694%

7th ICB 28.02501% 6.15% 3.89451% 21.87501% 17.98050%

8th ICB 23.27573% 6.15% 6.91700% 17.12573% 10.20872%

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

Famas Decomposition: DiversificationDiversification is the difference between the return that should have been earned according to theCML and the return that should have been earned according to the SML. If the portfolio iscompletely diversified, contains no unsystematic risk, then diversification measure would bezero. A positive diversification measure indicates that the portfolio is not completely diversified;it would contain unsystematic risk. If the diversification measure is positive, it represents theextra return that the portfolio should earn for not being completely diversified.

..equation-5.8


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Where:

Bp = the slope of the funds characteristics line during that time periodRm = the expected return on the market portfolio of risky assetsRFR = the average rate of return on a risk-free investment during the time period

6p = standard deviation of the specific mutual fund6m = standard deviation of the market

Here the difference between the return that should have been earned according to the CML andthe return that should have been earned according to the SML or the diversification of the ICBMutual Funds from 1st ICB to 8th ICB are given in the following Exhibit:

Rm

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