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

Abstract

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