Efficiency in Portfolio Management of Equity Funds and Methods of Its Evaluation

Abstract

The paper discusses the key problems of information transparency of mutual funds which impede their development in the domestic financial market. In Russia, open-end mutual funds have not yet fulfilled their potential for retail investors. Earning the trust of private investors for them is complicated by a lot of unsolved problems. The most severe ones relate to the level of transparency and accessibility of information. We analyze some restrictions imposed on efficiency evaluation of equity funds by their investments in foreign financial instruments, the weakness of the benchmarks, and non-transparent information about the investment strategies. The multifactor asset pricing model tailored to the domestic stock market was used as an additional method of evaluating risks and returns of the equity funds. We rationalize that these models allow for internationally standardized analysis of fund performance and can identify fundamental factors which generate sustainable excess return. Our study revealed significant exposure of excess return of the funds to the broad market index and the small-cap equity premium. Since the 2008 financial crisis, the significance of the factor models for fund returns has tended to decline as a result of an increase of foreign assets share in fund portfolios and outfl ows of foreign investors from the Russian stock market. Using different examples of portfolio composition from the equity funds, we show that, under certain conditions, some methods of portfolio rebalancing combined with information on past performance allow investors to gain an excess return.