FINANCIALPERFORMANCEINFLUENCINGFACTORS

Author:MLESCUIOANAROXANA

Coordinator:PROF.UNIV.DR.OBREJABRAOVEANULAURA

Abstract
Thispaperanalysistheinfluencingfactorsoftheperformanceofamutualfundthat

investsinlocalandforeignstockswithinEurope.Ihavemadeamarcoeconomicanalysisto
observe in which way factors such as overall market evolution or economic sector
performance, contribute to the change of profitability of the fund. Then I focused on the
microeconomic analysis to see how the profitability of the companies included in the
portfolio influence its performance. Thus I studied the way in which the volatile and
nonvolatileandvalueandgrowthstocksaffectstheoverallreturnofthefund.
KEYWORDS:Performance,benchmark,pricetobook,volatility,economicsectors,active
management,value,growth

Introduction
Thispaperentitled"Financialperformanceandinfluencingfactors",focusesonhow
thedevelopmentofvariousmacroandmicroeconomicvariablesinfluencetheevolutionof
mutualfundperformance.Itriedtoanalyzethemainfactorsinfluencingtheperformanceof
a mutual fund that invests in local and foreign shares. Some of such factors relate to the
overallevolutionofthemaineconomicsectors,theoverallevolutionofthemainmarketsin
whichitinvests,thedegreevolatilityofstockpricesintheportfolio.Ialsotriedtohighlight
theperformanceimpactofvalueandgrowthcompaniesontheperformanceofmutualfund
and the performance impact of volatile and nonvolatile shares on the performance of a
mutualfund.
Theaimofthisstudywastotestsomeassumptionsregardingthediffrentwaysof
analysing the performance of a fund shares. The more factors are taken into account the
moreaccuratetheanalysiswillbe.Factorssuchasthedegreeofportfoliodiversification,the
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active management, credit risk of the companies included in the portfolio, change in the
ratingsgivenbythespecialisedcompanies,shouldbetakenout.
Literaturereview
Oneofthefactorsconsideredintheperformancevaluationofmutualfundsrefersto
thedegreeofvolatilityofthesharesincludedintheportfolio.Oneextremecaserelatesto
buildingazerosystemicriskportfoliobasicallyinotherwords,aportfoliothathasthevalue
zeroofthebetaindicator.Suchaportfoliowouldhavetheexpectedreturnthesameasthe
riskfree rate value. Thus this portfolio would not be correlated with market evolutions,
given that the profitability obtained would be equal to the risk free rate, a relatively low
return.Aportfoliothathasabetaequaltozero,hasnoattractionforinvestorsinterestedin
bullmarketsbecausesuchaportfoliohasnoexposuretomarketandthereforewouldgeta
muchlowerperformancethanadiversifiedmarketportfolio.Inabearmarket,mightarouse
little interest to a zero beta portfolio, although in these cases, investors should look very
carefullyifisnotbetterandcheapertoinvestindepositsorinshorttermtreasurybills,than
toinvestinaportfoliowithbetazero.
Mostofthestockswhicharepartoftheutilitysector,havethebetalessthanone.
Conversely, companies with technological profile, have a beta value greater than one
because thesearecompaniesthathavegrowth potential,offering the possibility to obtain
higherreturnsbutinsteadrequiringtheacceptanceofadditionalrisk.
Some analysts have included in the profitability analysis of mutual funds how the
performanceofvalueandgrowthcompaniesaffectstheperformanceofthefund.Priceto
book is one indicator used to separate the companies in value and growth ones. This
indicatorshowsthemarketvaluegiventothebookvalueofthecompany.Itiscalculatedby
dividing the current price of the share at book values per share. Book values can be
expressedastotalnetdebt.IfthevalueofP/Bissmallthanthatstockiswellregardedby
investors.ManyinvestorsfindthecompaniesthathavealowP/B,potentialcandidates.
Emerging markets offer investors many benefits such as high rates of growth and
higher expected returns. Also, emerging markets are generating new investment
opportunities. However, investing outside the developed regions of the world, involves

takingseriousrisks.Oneofthemreferstotheexchangeraterisk.Investinginforeignstocks
generate revenues in the local currency of the place where the investment is made. Thus
investors mustconvertinto domesticcurrencythat local currency. So between apurchase
andasaleofsharesmayoccurexchangingratefluctuationsthatmayhaveinfluenceofthe
overallperformanceofthefund.

Thefactthatemergingmarketsreturnsdonotshowanormaldistributionisdueto
thefactthatthesemarketsarecharacterizedbymanychangesthatgeneratedifferentrates
of return at different times. Thus, it is impossible to use historical information in order to
estabanexactcorrelationbetweeneventsandreturns.
Emergingmarketsaregenerallylessliquidthanthoseinmaturemarkets.Thismarket
imperfection and results may lead to higher brokerage commissions and increased
uncertainty regarding the price. Investors who try to sell shares in a illiquid market face
substantialrisksduetothefactthattheirorderswillnotbeexecutedatthecurrentprice,
thefairprice,butwillrunatalowerprice,reachinganegativelevel.Alsowhybrokerswill
charge higher fees is because they have to make higher efforts to find counterparties to
executeorders.Basicallylowliquiditymarketsstopinvestorsrealizingthebenefitsofquick
transactions.
Therearecertainsituationswhereduetoinvestmentrestrictionsandlimitssetoutin
the prospectus of each fund, they adopt a defensive attitude in certain situations. For
example, when it is observed that there is a higher volatility in the economy in which the
fundinvestsorothernegativetrends,investmentmanagersarerestrictedtomaintainhigher
liquidity portfolio rate and thus can lose good investment opportunities affecting in a
negativewaytheoverallperformanceofthefund.
EmpiricalReview
Most analysts focus attention on a single industry, the assumption that in this way
wouldincreasetheirabilitytoassesstheactionsofindustry.Similarlyitispossibleforfund
managerstotakeadvantagefromtheconcentrationononesectorwhichmaycontainone
orseveralindustries.
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SomegeneralideastakenfromthearticlewrittenbyAshishTiwariin2001isthefact
thatsomesectorsarecharacterizedbyahigherdegreeofinformationasymmetrybetween
insidersandoutsiders.Thustheselectionofthecompaniesinthesesectorsrequireshigher
skills fromtheinvestmentmanager.Forexample,thestudiesillustratedthat mutual funds
that invest in real estate sector achieved a higher performance than the benchmark after
payingthecostsoffundsandtransactioncosts.
Asymmetry of information is a powerful argument for the technology sector. In
recent years has been dominated by companies whose market price depended on the
uncertain future potential of new technologies. In the article mentioned above all sector
funds were classified into seven categories: energy, financial, health, precious metals, real
estate,technologyandutilities.Thisclassificationwasbasedontheinvestmentobjectiveof
eachfundanddescriptionsofpublicfunds.Periodunderreviewwas19902000,aperiod
characterized by a strong performance of the stock market in the United States. The
analyzes showed that for the financial, healthcare and technology, the value of a dollar
invested in the portfolio of the sector fund is higher than investing in a representative
market index. Sector funds and sectoral indexes higher risk due to lower diversification of
investmentportfolios.
ThearticlebyEugeneFama(1997)statedthatmostvaluecompanieshaveahigher
return than growth companies. For example, between 1975 and 1995, the difference in
returnbetweenportfoliosthatinvestinstocksthathadhighlevelsoftheindicatorbookto
marketandportfoliosthatinvestinstocksthathadlowlevelsofthisindicatorwas 7.6%/
year,andvaluestockshavegeneratedreturnshigherthangrowthstocksin12of13cases.
Investmentmanagersclassifyfirmsindicatorsthathavehighratesofbooktomarket,price
toearningsorpricetocashflowasvaluecompany.Companiesthathavehighvaluesofthe
indicators mentioned above, are in most cases generating small profits, instead the
companiesthathavehighvaluesofthesameindicatorsaremostlygeneratinghighprofits.
The market undervalues the stocks of cheaper companies with less but stable profits and
overstatethestocksofexpensivecompanies.Whentheseassessmenterrorsarecorrected,
valueshareswillgeneratehigherreturnsandexpensiveshareswillgeneratelowerreturns.

The article by Antti Patajisto (2013) defined the concept of actively managed
investment fund. The study concluded that when there is high volatility and low market
returns, active management is relatively low. The author came to the following result: the
analyzedfundthathadapolicyofmoderateactivemanagement,hadapoorperformance,
losingtothetargetportfolio,by0.41%.Moreover,inanotherstudyofCohen,PolkandSilli
(2010) has been shown that the higher is the level of active portfolio management with
greater performance is obtained. In the case of hedging funds, has been concluded that
funds with large deviations from the target portfolio porformance get better than
conservativefunds.
Another method of measuring the level of active management concerns the
calculation if the indicator Tracking Error. It is calculated as the standard deviation of the
differencesinreturnsofthefundandtargetportfolio.
Trackingerror=STDEV*|RfondRindex|,
Usefulness of these indicators is reflected in whether the active positions of the
analyzed portfolio has exposure to systemic risk. Suppose that we have a diversified
portfolioof60shares.Iftheactivepositions(stocksthatareonlyinthemanagedportfolio
andarenotinthetargetportfolio)isinvestedonlyinoneeconomicsector,alltheseactions
willhavethesametrend,thusgeneratingahighertrackingerror.Alternatively,decidetoput
theavailabilityinmanyindustries,investinginasinglecompanyineveryindustry.Assume
thatthetargetportfolioinvestsinthesameindustries,butnotinonecompanybutmany.In
thiscasetheweightofthetotalfundadministeredstockxwillbelessthantheweightofthe
actionxintheindexofthebenchmark.Thusthefundishighlyselectivewithineachindustry,
sothatitwillgeneratehighactiveshareandlowtrakingerrorbecausetheassumedriskby
holdingactivepositionsisdiversified.
CaseStudy
The analyzed fund is an equity fund, it invests in companies established, listed and
tradedbothinRomaniaandinEurope(mainlyinPoland,HungaryandCzechRepublic).The
reasonforthisinvestmentstrategyisthatitisexpectedtoobtainasimilarpatternonalong
horizon, with the market in Romania. The Fund invests in companies with stable and

relativelyhighdividends.Allsubstantivegainsarereinvested.IREFfundinvestsprimarilyin
companiesthatarepartofthefinancialandenergysectorsbutisnotlimitedtothese.
Tocalculatethefund'sperformancehasbeenconsideredthenetasset value,NAV.
TheFundissubjecttopaymentofthreecharges(fixedchargesperyear).Theyarecalculated
basedonnetassetvalue.
The mutual fund performance has been quite volatile in the period analysed. The
minimum return was 12.36% in May 2010 and the maximum was 15.69% in July 2009.
Averagereturnwaspositive,withavalueof1.71%.
Analyzedbenchmarkindexofthemutualfundisacompositeindexthatiscomposed
of the following shares: 45% of BET (Romania), 10% BET FI (Romania), 25% WIG20
(Warsaw), 10% BUX (Budapest) and 10% PX (Prague). To calculate the profitability of
benchmark I went through the following steps: I built the database containing daily data
seriesofBET,BETFI,WIG20,BUXandPX.ThedataweretakenwithBloombergprogram.To
getallthepriceindicesinlocalcurrencyImultipliedthevalueofthepriceindexWIG20with
exchangeratePLN/EUR,IsplitthepriceBUXindexvaluetotheexchangerateEUR/HUF
and I split the price index PX value to exchange rate RON / CZK. The next step was to
calculate the seriesreturns for the five indexes bycomparing the current value(Tt) to the
previousvalue(Tt1).ThenIweightedtheyieldsforeachindextotheweightgiventoeach
of it in the total index benchmark, and thus I obtained a series of related returns of
benchmark.
Themaximumvalueofthemutualfundbenchmarkreturnis30,21%valuereachedin
April 2009.Theaveragereturnis1.93%. Thisvalueis closedtotheaveragereturnoffund
analysed.
Trackingerrorisanindicatorthatshouldbeanalyzedinordertoassesssystemicrisk.
Thesumofthedifferencesintheanalyzedperiodreturnsbetweenthetwofundsis6.64%
andthestandarddeviationis0.025.Thususingtheaboveformulawegetatrackingerrorof
0.169%.Thisvalueissmall,whichintuitivelymeansthatthevolatilityofthefundismostly
explainedbychangesintheexistingfund'sbenchmarkindexlevelandsystemicriskisvery
low.

Inthestudycaseregardingtheanalysisoftheimpactoftheperformanceeconomic
sectorsindicesontheperformanceofIREFFundwearetakingintoaccountthereturnsofsix
economic sectors indices. These are: MSCI WORLD/MATERIAL, MSCI WORLD/HEALTH MSCI
WORLD/FINANCIALS

MSCI

WORLD/TELECOMMUNICATION

MSCI

WORLD/ENERGY

MSCI

WORLD/UTILITIES.

Analyzed mutual fund invests primarily in companies in the financial sector, bank
specific. Thus the correlation between performance of the financial sector and fund
performanceisveryhigh,73%.
Anothereconomicsectorinwhichthefundinvestsisenergy.Theperformanceofthis
sectordependsonglobalenergysupplyanddemand.Energyproducerswillobtainfavorable
financialresultsintheperiodsinwhichtheoilandgaspricewillbehigh,butwillearnlessif
thevalueofenergywilldecrease.Thissectorisverysensitivetopoliticalevents,regarding
the history, that have led to large changes in oil prices. The correlation between
performanceofenergysectorandfundperformanceisquitehigh,being54%.
Companies in the health sector are usually considered as having a defensive policy
given that they provide products and services that have a high demand. Even in times of
recession, people will seek medical care and medicines in order to solve their medical
problems.Sogiventhatthehealthsectorhasanalmostconstantdemandformedicalgoods
andservices,itislesssensitivetofluctuationsineconomiccycles.Thecorrelationbetween
theperformanceofthehealthsectorandfundperformanceisslightlysmaller,itis39%.
If the performance of the energy sector would increase by 1%, the performance of
themutualfundwouldincreaseby0.59%.Iftheperformanceofthefinancialsectorwould
increase by 1%, the performance of the mutual fund would increase by 0.71%. Where
performance materials sector would increase by 1%, the performance of the mutual fund
would increase by 0.65%. If the health sector performance would increase by 1%, the
performance of the mutual fund would increase 0.90%. If the telecommunications sector
performancewouldincreaseby1%,theperformanceofthemutualfundwouldincreaseby
0.74%. If the utilities sector performance would increase by 1%, the performance of the
mutualfundwouldincreaseby0.96%.

In the study case regarding the analysis of the impact of the performance market
indices on performance of the IREF Fund we are taking into account the returns of five
marketindices.Theseare:BET,BETFI,PX,BUX,WIG20.
ThechangeinBETprofitabilityexplainsthebest,inproportionof76%thechangein
mutual fund performance. The performance of this fund is the least explained by the
evolutionoftheBETFIperformance.
IfBETperformancewouldincreaseby1%,theperformanceofthemutualfundwould
increase by 0.72%. If BET FI performance would increase by 1%, the performance of the
mutualfundwouldincreaseby0.30%.IftheperformanceoftheindexPXwouldincreaseby
1%,theperformanceofthemutualfundwouldincreaseby0.80%.Iftheperformanceofthe
indexBUXwouldincreaseby1%,theperformanceofthemutualfundwouldincrease0.59%.
If the performance of the index WIG20 would increase by 1%, the performance of the
mutualfundwouldincreaseby0.65%.
Innextthestudycaseregardstheanalysisoftheimpactoftheperformanceofvalue
andgrowthcompaniesontheperformanceoftheIREFFund.Ifacompanyhasashareprice
less than its carrying value, we can say that there is the possibility that the stock be
incorrectly valued by investors. This can happen due to temporary and without major
importanceeventsinthecompanythatdeterminesinvestorsnottoevaluatethestocksto
theircorrectvalue.Thusthesemomentsaresignalsandattractiveinvestmentopportunities
atalowprice.
To perform this analysis I did the following: I took the indicator price to book with
Bloombergprogramforallportfoliocompanies.Idividedthesecompaniesintotwogroups:
companiesthathaveaP/Bgreaterthanone(growthcompanies)andcompaniesthathave
aP/Blessthanone(valuecompanies).Wecalculatedthemonthlyreturnofeachshareas
theratiooftheprice.ThenIweightedthereturntotheweightgiventoeachactioninthe
portfolio. Thus I obtained a weighted monthly return one for growth shares and one for
valueactions.ItriedthustodeterminetheimpactoftheprofitabilityoftheshareswithP/B
highonfundperformanceandimpactoftheprofitabilityoftheshareswithP/Blowonfund
performance.

Changingprofitabilityofthegrowthsharesinfluenceinproportionof76%thechange
inreturnofmutualfund.Changingprofitabilityofthevaluesharesinfluenceinproportionof
85%thechangeinreturnofmutualfund.Iftheweightedperformanceofthestocksthat
haveP/Bhighwouldincreaseby1%,theperformanceofthemutualfundwouldincrease
by1.89%.IftheweightedperformanceofthestocksthathaveP/Bsmallwouldincreaseby
1%,theperformanceofthemutualfundwouldincreaseby1.69%.
The last study case regards the analysis of the performance of volatile and
nonvolatile companies on the performance of the IREF Fund. Beta coefficients were
obtained after running regressions between each portofolio stock returns and the
representativemarketindex.Ihaveusedthemarketmodel.Thusforthereturnsofshares
listedontheWarsawstockexchangewaschosentheindexWIG20,forthereturns ofthe
shares listed on the Prague Stock Exchange was chosen PX index, for the returns of the
shareslistedontheBudapestStockExchangewaschosenBUXindexandforshareslistedon
the Bucharest stock exchange were selected BET and BETFI indexes depending on the
profileofeachcompany.
To perform this analysis I proceeded as follows: I calculated the coefficient of
volatilitywiththemarketmodelforallportfoliocompanies.Idividedthesecompaniesinto
two groups: companies that have a higher volatility than the market (volatile companies)
and companies that have less volatility than the market (companies nonvolatile). We
calculated the monthly return of each share as the ratio of the price. I then weighted the
return to the weight given to each action in the portfolio. Thus I obtained a weighted
monthlyreturnforsharesvolatileandonefornonvolatilestocks.Itriedthustodetermine
theimpactoftheprofitabilityofthevolatilesharesonfundperformanceandimpactofthe
profitabilityofthenonvolatilesharesonfundperformance.
Changing profitability of the volatile shares influence in proportion of 7,16% the
changeinreturnofmutualfund.Changingprofitabilityofthenonvolatilesharesinfluencein
proportion of 82% the change in return of mutual fund. If the weighted performance
volatileshareswouldincreaseby1%,theperformanceofthemutualfundwouldincreaseby
0.44%. If the weighted performance nonvolatile shares would increase by 1%, the
performanceofthemutualfundwouldincreaseby1.62%.Thisrelationshipisconfirmedand
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substantiated by the fact that the mutual fund is considered less volatile than the
benchmarkindexandthusnonvolatileshareshaveagreaterimpactinachievingthefund's
performance.

Conclusionsandproposal
Thetheperiodcoveredbythecasestudyisrelativelysmallandincludedaperiodof
economic instability due to the global financial crisis, but managers and analysts should
improve their techniques for analyzing and forecasting market development variables .My
proposal for this fund to obtain better performance in the future is greater portfolio
diversification and the purpose of investing in the mature and stable markets. The
investment managers should pay attention to more factors from microeconomic and
macroeconomic environment. They should consider more financial aspects and corporate
governance,particularlyinmanagement,withineachcompany.
Bibliography
Booksandscientificarticles
1. Fama, E., Kenneth F. (2007) The anatomy of value and growth stocks returns,
CRSPWorkingPaper.Disponibillahttp://ssrn.com/abstract=806664;
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522421000;
3. Partha, M. (2004) Separating Winners from Losers amoung Low BooktoMarket
StocksusingFinancialStatementAnalysis,ColumbiaBusunessSchool,NewYork,
NY10027;
4. Plantinga, A. (2005) Performance measurement for pension funds, University Of
Groningen;
5. Petajisto,A.(2013)ActiveShareandmutualFundPerformance,NYUSternSchool
ofBusiness,NewYork,NY100121126;
6. Falkenstein, E. (2009) Risk and return in general: Theory and Evidence, SSRN.
Disponibillahttp://ssrn.com/abstract=1420356;
7. Plantinga,A.&Groot,S.(2001)RiskAdjustedPerformancemeasuresandimplied
riskattitudes,SOMthemeE:Financialmarketsandinstitutions,Newyork;
8. Fama,E.,KennethF.(1998)ValueversusGrowth:TheInternationalEvidence,The
JournalofFinance,VolLIII,Nr.6;
9. Cogneau, P. (2009) The 101 Ways to measure portfolio performance, Journal of
PerformanceMeasurement,Vol13,Nr.4.
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1. ING International
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2. ING International
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3. ING International
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5. ING International
Luxemburg

(2008) Annual Report and Audited financial statements,

(2009) Annual Report and Audited financial statements,
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(2011) Annual Report and Audited financial statements,
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