Evaluation of Performance and Efficiency of Polish Open-End Mutual Funds under High Volatility Environment in Financial Markets

Abstract

Theoretical background: Retail investors in the financial market have nowadays access to a wide range of investment products. One of the types of such products are open-end investment funds, which by design are asset masses managed by professional entities. Open-end investment funds became one of the more popular financial instruments that retail customers purchase.

Purpose of the article: This article aims at determining the efficiency of mutual funds as measured by the rate of return. An important point of the study is to determine whether funds with lower total risk as measured by standard deviation achieved lower losses.

Research methods: The research method is an analysis of performance of twenty Polish open-ended mutual funds in three different time horizons, by using classic mutual fund performance measures adjusted for negative returns, i.e. Sharpe, Treynor and Jensen alpha indicators as well as the Israelsen and Treynor ratios adjusted for negative return.

Main findings: It has been observed that the high volatility in the financial market had a direct negative impact on the returns of these funds. When comparing the Treynor ratio adjusted for negative returns values it appears that some of the analysed equity funds performed better than, for example, stable growth funds. In case of high volatility in the stock market, both in the long and short term, the analysed stable growth funds did not bring more value to investors in relation to the total risk incurred than balanced or even equity funds, which is particularly noticeable in the case of three-year and annual results. This is because asset diversification did not fully work in the high market volatility seen since the beginning of 2022 mostly due to falling prices of debt securities caused by interest rate increases. The article also contributes to the interpretation of Sharpe and Israelsen ratios in case of similar negative rates of return and different volatility measured, because the Israelsen ratio may not be the best to compare such funds as it prioritizes the funds with lower risk and does not consider relation of risk to return.