Factors Affecting The Performance Of Investment Funds In Viet Nam.pdf

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

HO CHI MINH UNIVERSITY OF BANKING

DR NGUYEN DUY LINH

HO CHI MINH CITY, YEAR 2024

ABSTRACT

The strong development of Vietnam's financial market in recent years has sparked a wave of new investors joining the stock market to find a potential investment channel For individuals who do not have expertise in the financial sector, it is extremely difficult to make a reasonable investment choice, since then the investment fund has emerged as a professional and safe investment channel, simultaneously brings attractive returns to investors The rapid increase in the number of new investors coupled with the increased demand to deposit money in investment funds is the driving force for the strong development of the "Investment Fund" field with outstanding profits, followed by the increasing number of investment funds in Vietnam From the reason above, choosing a reasonable investment fund with a good return is one thing that makes investors concerned Predicting and evaluating the performance of an investment fund requires evaluation based on many aspects as well

as different factors The thesis "Factors affecting the performance of investment funds in Vietnam" is made through the study of 16 investment funds in Vietnam in the

period from January 2020 to December 2023, will clarify the factors that investors need to pay attention when investing in funds

The thesis uses the GLS regression method with the dependent variable being

the performance of the investment fund (FRR), calculated by Sharpe ratio and the independent variables being the total net asset of the fund (TNA), portfolio turnover rate (PTR), fund’s expense ratio (FER), age of the fund (AGE), net cash flow (NCF), inflation rate (INF), and money supply growth (MSG) After testing and correcting

the defects of research model, the results show that the variables of total net asset, fund’s expense ratio, age of the fund, net cash flow and money supply growth have a significant positive influence on the performance of investment funds in Vietnam, while the portfolio turnover rate variable has a negative effect In addition, the inflation rate has a negative correlation with investment performance, but it is not statistically significant in the research model

Based on the research results, the thesis contributes to propose suggestions and policy implications for fund managers to come up with flexible and appropriate investment strategies to improve the fund's performance as well as limit the risks in the process of fund management

Keywords: investment fund, performance, total assets, portfolio turnover rate,

expense ratio, age of the fund, net cash flow, inflation rate, money supply growth

STATEMENT OF COMMITMENT

My name is Huynh Hoai An, and I solemnly affirm that the research topic

"Factors affecting the performance of investment funds in Vietnam" is my individual

research project, completed through the process of work and experimental research under the guidance of Dr Nguyen Duy Linh

The research results are truthful, free from any copying of materials, and have not been fully disclosed anywhere All data and citations in the thesis are clearly annotated with transparent and traceable sources

I take full responsibility for this commitment

Ho Chi Minh City, day…month…, 2024

Author

Huynh Hoai An

I sincerely appreciate the leadership of Ho Chi Minh University of Banking for organizing and facilitating favorable conditions throughout the process of completing my thesis

I am grateful to my family and loved ones who have consistently stood by me, offering encouragement, care, and support throughout my academic journey and the completion of this thesis

Due to my limited knowledge and the fact that I have not extensively delved into the subject matter, I acknowledge that the thesis may have shortcomings I earnestly welcome feedback and additional guidance from esteemed professors to enhance the completeness of the thesis

I express my heartfelt thanks!

CHAPTER 2: THEORETICAL FRAMEWORK AND EMPIRICAL STUDIES

9

2.1 Investment fund 9

2.1.1 Concept of investment fund 9

2.1.2 The performance of investment fund 9

2.2 Theoretical framework 12

2.2.1 Efficient Market Hypothesis (EMH) 12

2.2.2 Modern Portfolio Theory (MPT) 13

2.2.3 Capital Asset Pricing Model (CAPM) 14

2.2.4 Arbitrage Pricing Theory (APT) 16

2.3 Factors influencing the performance of fund 17

3.3 Sample and research data 47

CHAPTER 4: RESEARCH RESULTS AND DISCUSSION 53

4.1 Current status of investment fund operations in Vietnam 53

4.2 Descriptive statistics 58

4.3 Research results 60

4.3.1 Correlation analysis of the research model 60

4.3.2 Comparison between Pooled OLS, FEM, and REM models 63

4.3.3 Testing model defects 65

4.3.4 Model correction using GLS 66

4.4 Discussion of research results 68

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS, POLICY IMPLICATIONS 74

5.1 Conclusion 74

5.2 Policy implications 76

5.2.1 Proposals regarding fund size for investment funds in Vietnam 76

5.2.2 Proposals regarding portfolio turnover rate for investment funds in Vietnam

77

5.2.3 Proposals regarding expense ratio for investment funds in Vietnam 77

5.2.4 Proposals regarding fund age for investment funds in Vietnam 78

5.2.5 Proposals on net cash flow for investment funds in Vietnam 78

5.2.6 Proposals on money supply growth for investment funds in Vietnam 79

5.3 Limitations of the study and future research directions 80

5.3.1 Limitations of the study 80

5.3.2 Future research directions 81

REFERENCES 83

APPENDIX 1 LIST OF INVESTMENT FUNDS IN VIETNAM IN THE THESIS SAMPLE 90

APPENDIX 2 RESEARCH DATA 91

APPENDIX 3 REGRESSION RESULTS 100

LIST OF ACRONYMS

LIST OF TABLES

Table 2.1: Summary of research outlines 29

Table 3.1: Research process 37

Table 3.2: Statistical significance and expected signs of variables in the model 46

Table 4.1: Descriptive statistics of variables 58

Table 4.2: Correlation matrix between variables 60

Table 4.3: VIF multicollinearity test 62

Table 4.4: Results of regression analysis according to Pooled OLS and FEM 63

Table 4.5: F-test to choose between two models Pooled OLS and FEM 64

Table 4.6: Results of regression analysis according to REM and FEM 64

Table 4.7: Hausman test to choose between 2 models FEM and REM 65

Table 4.8: Lagrange test results 65

Table 4.9: Results of the Wooldridge test 66

Table 4.10: Results of GLS regression analysis 67

Table 4.11: Testing results using the GLS method 68

LIST OF FIGURES

Figure 4.1: Statistics on the number of investment funds and total net asset value (NAV) of funds in the Vietnamese stock market .54 Figure 4.2: Statistics on the number of funds by type and percentage of open-end funds in the Vietnamese stock market 56

CHAPTER 1: INTRODUCTION

Chapter 1 will provide specific reasons for selecting the research topic and simultaneously outline the overall objectives and specific goals of the study Additionally, this chapter will present relevant research questions, clearly define the scope and the research subject Furthermore, the scientific and practical significance of the topic will be elucidated to clarify why the research project is important and valuable Finally, the chapter will introduce the overall structure of the thesis, helping readers understand how the various sections of the research are organized and arranged

1.1 Urgency and rationale for the choice of topic

Over the past decade, the role of investment funds in the financial market has significantly increased This notable surge is evident in the growth of assets held by investment funds globally, rising from $23.8 trillion at the end of 2011 to $63.39 trillion in the end of Q3.2023 (ICI, 2024) In the U.S market, fund management companies play a crucial role and own more than a quarter of the equity market Investment funds are highly valued for their diversity, professional management, liquidity, flexibility, and convenience they bring Additionally, investment funds are crucial for the development of the stock market and the economy, as they are managed and held by institutional investors who own a significant portion of capital in the market

However, research on investment funds still faces numerous challenges While most theoretical models used to evaluate the performance of investment funds rely on assumptions of Modern Portfolio Theory (MPT) and explain the relationship between risk and expected returns, as well as the famous Efficient Market Hypothesis (EMH), which posits that stock prices fully reflect all available information, these assumptions are hardly met in reality Particularly, research in this field often focuses on developed markets and neglects investment funds in emerging markets The profitability of investment funds in emerging markets faces difficulties such as high

volatility, high transaction costs, and infrequent trading (Bekaert and Harvey, 2002) Moreover, there are still doubts about whether factors identified to influence in developed markets also apply to emerging markets (e.g., Claessens et al., 1995; Fama and French, 1998) This lack of understanding hinders the development of the fund industry in emerging markets

The growth of investment funds in emerging markets has had a significant impact on the development of the stock market and holds crucial importance for financial policies However, this growth can also lead to irrational behavior and make the market more volatile Emerging markets possess distinctive characteristics, such as high instability, incomplete financial systems, unclear regulations and legal procedures, and a lack of transparency and honesty This creates an uncertain investment environment and may increase the risk for investment funds

Another challenge in researching investment funds in emerging markets is the collection of information and data Often, information and data about funds in these markets are not publicly disclosed or are incomplete, with inconsistent disclosure methods This poses difficulties in evaluating the performance and risks of investment funds Additionally, audit and oversight processes may not meet the standards equivalent to those in developed markets, resulting in a lack of transparency and reliability in fund management and reporting

To address these challenges, more effort is needed in researching and gaining a better understanding of investment funds in emerging markets Strengthening international cooperation and information exchange will help improve data collection and the assessment of fund performance Furthermore, efforts from fund management organizations and governments are required to enhance transparency standards and audit processes in the industry

For investors, thorough research and understanding of investment funds in emerging markets are crucial Careful consideration of liquidity, risk management, performance history, and investment strategies of funds is necessary before making

investment decisions Diversifying investment portfolios is also an effective method to minimize risks when investing in emerging markets

In summary, research on investment funds in emerging markets is an important and challenging field Understanding the specifics of factors and conducting meticulous research processes are necessary to achieve profitability and minimize risks when investing in funds in emerging markets Currently, there is a limited number of studies on the performance of investment funds in Vietnam, despite the rapid growth in the number of investors and the value of assets managed by these funds in recent years Recognizing the importance of this research topic, the author

has chosen "Factors affecting the performance of investment funds in Vietnam" as

the research topic for the graduation thesis

1.2 Research objective 1.2.1 General objective

The general objective of the thesis is to identify the factors influencing the performance of investment funds in Vietnam Subsequently, the study aims to provide recommendations and policy implications to enhance the performance of investment funds in Vietnam in the near future

1.2.2 Specific objective

Based on the general research objective, the thesis establishes the following specific objectives:

Firstly, identify the factors influencing the performance of funds in Vietnam,

thereby constructing a suitable research model

Secondly, analyze the degree of influence and the direction of influence of

specific factors in the field of investment funds

Thirdly, provide recommendations for fund managers to develop an appropriate

and secure investment strategy Additionally, offer guidance for investors to evaluate and choose suitable investment funds, aiming for superior investment performance

- Based on the research findings, what solutions and recommendations can assist fund managers in developing appropriate and secure investment strategies?

1.4 Research subjects and range 1.4.1 Research subject

The primary research subjects of the thesis are the factors influencing the performance of investment funds in Vietnam

1.4.2 Research range 1.4.2.1 Spatial range

The research sample consists of 16 investment funds in Vietnam during the period from 2020 to 2023 The data is collected from monthly investment activity reports and annual financial reports that have been audited The criteria for selecting funds include those established and continuously operating from January 2020 to the end of December 2023, with necessary data published clearly and comprehensively in monthly and annual investment activity reports

1.4.2.2 Time range

The research time frame is chosen from January 2020 to December 2023 This period represents a dynamic phase for Vietnam's economy and stock market, marked by the significant impact of the Covid-19 pandemic

1.5 Practical scientific significance

The research results in this thesis can assist fund managers in evaluating and identifying factors influencing the performance of funds This, in turn, allows for the

development of methods and strategies to enhance the performance of funds in the future

1.6 Research methodology 1.6.1 Research method

The thesis employs a quantitative research method to assess and analyze the factors influencing the performance of investment funds in Vietnam

Quantitative method: The study employs the panel data regression technique

to analyze the impact of factors on the performance of investment funds in Vietnam The Ordinary Least Squares (OLS) method is used for estimation, incorporating both Fixed Effect Model (FEM) and Random Effect Model (REM) Subsequently, the author employs the Hausman Test to examine the suitability of the model with FEM and REM, selecting the optimal model for OLS regression Next, the author examines potential flaws in the model such as autocorrelation, multicollinearity, and heteroskedasticity In cases where regression assumptions are violated, the author utilizes the Generalized Least Squares (GLS) method to address model shortcomings, providing insights into the influence of factors on the performance of investment funds in Vietnam

1.6.2 Data collection and processing

The thesis utilizes secondary data, with micro-level data on factors collected from monthly investment activity reports and annual financial reports of 16 investment funds in Vietnam Macro-level data is sourced from reports by the State Bank of Vietnam (SBV), the International Monetary Fund (IMF), and the World Bank

1.7 Research contribution

While there have been numerous studies worldwide on the performance of investment funds, this topic has not received significant attention from researchers in Vietnam, and the number of studies on this subject in Vietnam remains limited Anticipating the future development of the Vietnamese stock market and,

consequently, the growth of the investment fund sector, the author decides to delve deeper into this field in Vietnam Building on the findings of international research and expanding on current issues, the study aims to understand and identify the factors influencing the performance of investment funds in Vietnam Subsequently, it proposes strategic implications to assist fund managers in developing effective measures and methods to enhance the performance of investment funds in Vietnam

Chapter 2: Theoretical framework and empirical studies

This chapter will discuss the concept of measuring the performance of fund operations It will then review empirical research globally and domestically on factors affecting the performance of investment funds in Vietnam

Chapter 3: Research model and methodology

Building on the theoretical foundation and empirical evidence presented in Chapter 2, Chapter 3 will construct a research model and propose hypotheses regarding the influence of internal and macro variables on the performance of investment funds in Vietnam The chapter will also address the research data, analyze research methods, and outline the research process to achieve results aligned with the set objectives

Chapter 4: Research results and discussion

Based on the research model and methodology presented above, Chapter 4 will demonstrate the results of statistical analysis, describe the variables in the model, conduct correlation analysis, test regression hypotheses, and perform tests to select

the most suitable model Through the discussion of research findings, the thesis will identify which factors truly impact the performance of investment funds and the extent of their influence

Chapter 5: Conclusion and recommendations, policy implications

Derived from the research results in Chapter 4, this chapter will provide key conclusions and offer recommendations, proposals, and policy implications to enhance the performance of investment funds in Vietnam Additionally, it will present the limitations of the study and propose directions for further research

CHAPTER 1 SUMMARY

Chapter 1 emphasizes the importance and necessity of researching the factors influencing the performance of investment funds in Vietnam Starting from the general research objective, the thesis identifies specific research goals to be addressed through corresponding research questions Subsequently, it defines the research subjects and range, focusing on 16 investment funds in Vietnam over the period from January 2020 to December 2023 The quantitative research method is employed based on previous studies, expanded to update the factors affecting the performance of investment funds that may change over time Finally, this chapter outlines the structure of the thesis, consisting of five chapters, and provides a summary of the main content of each chapter

CHAPTER 2: THEORETICAL FRAMEWORK AND EMPIRICAL STUDIES

Chapter 2 will conduct a review of the theoretical foundation and empirical evidence both domestically and internationally regarding the impact of factors on the performance of investment funds in Vietnam Subsequently, the chapter will engage in a discussion to identify the gaps in the existing research

2.1 Investment fund

2.1.1 Concept of investment fund

Investment funds are financial intermediaries that attract capital from various sources, pooling it to invest in stocks, bonds, cash, or other types of assets All these investments are professionally managed, rigorously overseen by fund management companies, regulatory banks, and other authorized agencies In other words, investment funds are established based on the contributions of multiple entities with capital who aim to collectively engage in investment activities This collaborative approach enhances professionalism in investment operations, ultimately maximizing the profits for the participants (Reilly & Brown, 2020)

Besides professional capital management, investment funds contribute to risk reduction in investment by diversifying their portfolios This diversification helps minimize risks associated with individual assets Additionally, investment funds achieve cost efficiencies through economies of scale (Vershinina et al., 2016)

2.1.2 The performance of investment fund

According to Maheswari & Dineshkumar (2019), the investment performance of a fund refers to how efficiently a fund management company achieves its goals regarding profitability and risk These objectives might involve seeking a high return on capital with a considerable level of risk to achieve fund growth Alternatively, the goals could be focused on generating income from dividends and capital gains with lower risk compared to other type of funds Balanced funds aim to achieve a combination of income, growth, and stability

The performance of an investment fund can be analyzed through performance measures used in portfolio analysis (George & Hwang, 2011) Various models are employed to evaluate fund performance Most studies use five performance measures to assess the performance of investment funds: Sharpe ratio, Jensen's alpha, Treynor measure, Sortino ratio, and Information ratio While Treynor measures the systematic risk using the beta coefficient, Sharpe focuses on the overall portfolio risk of the fund

Measuring the performance of investment fund

Typically, when making a decision, we often ponder its consequences Therefore, when an investor entrusts money to a fund for investment on their behalf, they seek to understand the outcomes Does the investment fund deliver superior performance? How does it compare to other funds? And which method is employed? Evaluating performance involves measuring the skill of asset managers, and its main idea is to compare the returns of an investment portfolio with an alternative investment portfolio in a specific scenario The emergence of Modern Portfolio Theory (MPT) by Markowitz in 1952 opened up numerous possibilities for developing methods to measure portfolio performance MPT quantifies how smart investors make decisions based on expected returns and risks, leading to the progression of performance metrics from rudimentary measures to more accurate ones, adjusted for risk As mentioned in the theory above, various methods have been proposed to assess the performance of investment portfolios, aiming to find a reliable and accurate model

Although researchers have utilized different methods to evaluate portfolio performance, their common goal is to create a means to distinguish outstanding investment funds from others However, choosing the most suitable model for assessing performance in a specific case remains a challenge

Selecting an appropriate model depends not only on the measurement method used but also on the suitability of that method with the evaluated data and market This requires careful consideration and in-depth understanding of the characteristics of the investment portfolio and influencing factors The objective is to find an overall

performance evaluation model that provides a reliable way to measure and compare the performance of investment funds, helping investors make informed decisions and optimize profits

According to researchers, the operation of a fund is determined by the success of portfolio managers in achieving a balance between different return rates and an acceptable level of risk This is necessary for investors to have a clear view of the fund's ability to generate stable profits and withstand risk Combining the assessment of returns and risk in evaluating the performance of investment funds will help investors make intelligent investment decisions Therefore, evaluating the performance of investment funds involves not only measuring returns but also assessing the level of risk associated with those returns over a specific period

Hence, this research utilizes the Sharpe ratio to measure the performance of

investment fund (FRR)

Sharpe Ratio

The Sharpe ratio, proposed by Sharpe (1966), is a metric used to evaluate the performance of an investment portfolio In contrast to the Treynor method, which relies on the Security Market Line (SML), the Sharpe ratio is developed based on the Capital Market Line (CML) and measures the portfolio's excess return over its total risk, quantified by the standard deviation The key aspect of this metric relies on the slope of the CML, indicating the ratio of market risk to its standard deviation If the Sharpe ratio of a portfolio exceeds this value, it implies that the performance of that portfolio is compared to a benchmark, and vice versa The Sharpe ratio is calculated using the formula:

SRp =E(Rp) - Rf

Where SRp is the Sharpe ratio of portfolio p, E(Rp) is the expected rate of return of portfolio p, Rf is the risk-free rate of return, and σp is the standard deviation of the rate of return of the portfolio during the specific measurement period

2.2 Theoretical framework Relevant theories

The theoretical evaluation will provide insights into theories related to the operations of investment funds, with a particular focus on theories relevant to risk and the performance of investment funds Some explored theories include: Efficient Market Hypothesis (EMH), Modern Portfolio Theory (MPT), Capital Asset Pricing Model (CAPM), and Arbitrage Pricing Theory (APT)

2.2.1 Efficient Market Hypothesis (EMH)

The Efficient Market Hypothesis (EMH), introduced by Fama (1970), asserts that stock prices reflect all publicly available information Trading based on insider information is deemed illegal, and even if it were possible, there would not be enough informed investors to significantly impact the overall volatility of any given stock Most financial products available to investors today acknowledge the practicality of EMH Passive investing, diversification, and overall market indices as a benchmark for performance measurement are outcomes of the belief in EMH

EMH is built on three assumptions: Firstly, EMH posits that all investors perceive available information in the same way Secondly, according to EMH, no individual investor can achieve higher profits than another with the same amount of investment because all publicly available information they possess is identical Thirdly, no investor can beat the market or achieve an average annual profit higher than the profit of all investors and funds attempting to do so

However, the Efficient Market Hypothesis (EMH) does not provide a clear definition of the time required for the value of an asset to return to a reasonable level This is because EMH is a theoretical model, and real markets are not entirely efficient Several factors can influence the time needed for the value of an asset to return to a reasonable level, such as the severity of the event causing the price drop, the availability of information about the event, and investor psychology EMH also asserts that random events are entirely acceptable in efficient markets This means

that prices may be affected by random events, such as news reports or natural disasters, but these events will ultimately be resolved, and prices will return to normal However, it should be noted that EMH does not guarantee that prices will always return to normal Some events, such as the collapse of a major financial institution, may have a long-term impact on asset prices

2.2.2 Modern Portfolio Theory (MPT)

Modern Portfolio Theory (MPT), formulated by Harry Markowitz (1952), is a hypothesis based on the idea that risk-averse investors can construct investment portfolios to optimize or maximize expected returns based on a certain level of market risk It emphasizes that this risk creates a higher reward for investors willing to take risks MPT suggests that examining the risk and expected return of a specific asset is insufficient Instead, by investing in more than one type of risky asset, investors can benefit from diversification (also known as not putting all eggs in one basket) and, in particular, reduce the risk of the investment portfolio

One of the fundamental assumptions of this theory is that investors attempt to maximize the discounted expected rate of return while simultaneously minimizing the variance of the undesired rate of return Variance measures the deviation from expectations, with larger variance indicating higher volatility and greater risk Expected returns can be measured using the yields of investment assets, while the variance of returns is considered as risk Portfolio selection is done using the minimum variance rule for expected returns Therefore, evaluating this relationship is the foundation for investor decisions, eliminating subjective factors in the decision-making process

MPT suggests that an 'efficient frontier' of optimal investment portfolios can be constructed, providing the maximum expected return possible with a certain level of risk The efficient frontier can be defined as the combination of assets with the highest expected returns higher than any other combination and providing the highest profit with the lowest risk

The return on an investment portfolio is the weighted sum of the expected returns of its component assets, i.e.:

E(Rp) = Ʃ wi * E(Ri)

Where Rp is the expected rate of return of the investment portfolio, Ri is the

expected rate of return of asset i, and wi is the weight of component asset i (i.e., the ratio of asset i in the investment portfolio)

The variance of the investment portfolio is calculated as follows:

σp2 = Ʃ wi2 σi2 + Ʃi Ʃj≠i wi wj σi σj ρij

Where ρij is the correlation coefficient between the returns on asset i and asset j The expression can be written as:

σp = Ʃi Ʃj wi wj σi σj ρij Where ρij = 1, so i = j

MPT concludes that diversification creates a superior investment portfolio This helps minimize risk while ensuring that assets are not highly correlated with each other

However, MPT also has limitations One of the main challenges is estimating the correlation coefficient between two assets This is particularly complex when applied to multiple assets with diverse characteristics and is often impractical to implement In reality, there are countless possibilities for constructing and selecting investment portfolios

2.2.3 Capital Asset Pricing Model (CAPM)

The CAPM is a notable achievement in the field of financial economics, introduced by William Sharpe, a Nobel laureate in Economics, in 1970 through his book "Portfolio Theory and Capital Markets" He presented an important idea that individual investors face two types of risks: systematic risk and unsystematic risk Systematic risk is the undiversifiable risk of the entire market, such as interest rates, economic recessions, wars, and similar factors On the other hand, unsystematic risk or specific risk is the risk associated with individual stocks and can be minimized by

increasing the number of stocks in the investment portfolio This represents the portion of profit not dependent on the overall market volatility

The CAPM provides a method to measure the benefits of diversifying an investment portfolio It allows investors to assess the level of unsystematic risk of a stock and calculate expected returns based on this level of risk This assists in constructing an optimal investment portfolio, meaning a portfolio that achieves the highest return for a certain level of risk

While MPT demonstrates that specific risks can be eliminated through diversification, diversification still does not address issues related to systematic risk, even if an investment portfolio contains all stocks in the stock market, that risk cannot be eliminated Therefore, CAPM provides a way to measure this systematic risk when calculating expected returns

Sharpe (1964) observed that the return on an individual stock or a stock portfolio should be equal to its cost of capital The standard CAPM formula describes the relationship between risk and expected return as follows:

Ra = Rf + βa * (Rm – Rf) Where:

Rf = Risk-free rate

βa = Beta coefficient

Rm = Expected market return

(Rm - Rf) = Market risk premium

The CAPM, a model for pricing financial assets, has a crucial starting point: the risk-free rate, often represented by the 10-year government bond yield However, to compensate for the risks that equity investors bear, a risk premium is added The "market risk premium" is calculated by subtracting the expected market return from the risk-free rate This creates an "equity risk premium" multiplied by a coefficient called "Beta", proposed by Sharpe in 1964

Beta is a measure of the relative volatility of a stock, indicating how much the stock price fluctuates compared to the market A beta coefficient greater than one

suggests that the asset is more sensitive to market fluctuations and has higher volatility Conversely, a beta coefficient less than one indicates that the asset is less sensitive and has lower systematic risk

The formula for calculating beta is given by:

βi = Cov(Ri Rm)/Var(Rm)

CAPM relies on several assumptions about the market and investor behavior to establish a set of equilibrium conditions These conditions allow us to predict the return of an asset based on its systematic risk (non-diversifiable risk) By using a measure of systematic risk that can compared across be assets in the market, the theory enables investors and fund managers to optimize investment portfolio and determine desired rates of return

However, a limitation of CAPM is the infinite number of assets in the market portfolio Observing and evaluating all these assets becomes impractical Instead, CAPM uses a single index to represent the entire market This limitation restricts the model's ability to be tested and applied comprehensively, as it simplifies the diverse nature of the real market

2.2.4 Arbitrage Pricing Theory (APT)

Ross (1976) introduced a significant pricing theory known as the Arbitrage Pricing Theory (APT) This theory is based on the idea that the returns of an asset can be predicted through the relationship between that asset and several common risk factors APT predicts the relationship between the returns of an investment portfolio and the returns of individual assets by combining linearly independent macroeconomic variables

APT is considered a more flexible alternative to the CAPM model While CAPM requires expected market returns, APT uses the expected returns of risk assets and the risk premium associated with various macroeconomic factors, such as

variations in gross domestic product (GDP), inflation rate (INF), and interest rate

structures

The fundamental concept of APT is that investors can seek theoretically free profits by exploiting mispriced securities These securities have prices different from the theoretical prices predicted by the APT model Therefore, arbitrageurs can take advantage of these opportunities to generate profits

risk-The APT model originates from the examination of unpredictable factors influencing asset returns Instead of focusing on a single factor as in the CAPM model, APT considers a set of factors affecting asset returns as follows:

E(Rj) = Rf + UR

Where:

E(Rj) is the expected return of asset j, Rf is the risk-free rate, and

UR is the unforeseen rate of return

The unforeseen component depends on identified economic factors and is expressed as:

UR = β1F1 + β2F2 + β3F3 + … + βnFn

Where:

βi is the beta of factor i, β = b(Rfactor - Rf)

The beta coefficient measures the sensitivity of each stock to a specific factor,

and (Rfactor - Rf) estimates the risk premium on each factor

2.3.1.1 Total net asset (TNA)

The growth of net asset value provides cost advantages, subsequently increasing net profitability With an increase in the fund's scale, trading volume rises, leading to

lower broker commissions for larger funds Additionally, costs related to data access, research and support services, as well as management and overhead costs, do not increase proportionally with the fund's scale

Numerous studies have explored the relationship between the scale of investment funds and performance, yet the results remain inconclusive Larger funds have economic scale advantages as they can allocate fixed costs and access more resources Moreover, managers of larger funds may have better investment opportunities, and brokerage commissions may decrease with higher transaction volumes (Ciccotello, 1996)

Farid & Wahba (2022) on the impact of fund scale on the operational efficiency of investment funds in Egypt, analyzing seven types of investment funds in Egypt from 2012 to 2017, reveals a significant inverse relationship between fund scale and operational efficiency Chen et al (2004) in their analysis of operational components argue that there is an inverse relationship between fund scale and operational efficiency They posit that after a fund reaches a certain scale, maximizing profits is no longer a priority, and they contend that liquidity and uneconomical scale-related costs erode performance Consistent with these findings, Hornstein & Hounsell (2016) and Yan (2008) present similar results in their studies

On the contrary, Ammann & Moerth (2005) investigate whether increasing assets in the fund industry reduce profits and specifically whether larger funds operate less efficiently than smaller ones The study provides some evidence for a positive relationship between fund scale and the performance of investment funds Liang (1999) and Bauer et al (2005) produce similar results in line with the aforementioned studies

2.3.1.2 Portfolio turnover rate (PTR)

The portfolio turnover rate provides information about the duration a fund manager holds a stock in their investment portfolio A higher turnover rate implies that a fund manager actively adjusts the portfolio composition frequently, potentially increasing costs for the fund

Empirical results regarding the relationship between fund performance and portfolio turnover rate are contradictory However, Rehman & Baloch (2015) investigated the performance of 44 investment funds operating in Pakistan from 2010

to 2014 The research demonstrated that PTR has a positive impact on the operational

efficiency of funds Other researchers also yielded similar results, such as Dahlquist et al (2000) and Wermers (2000) On the other hand, Elton et al (1993) and Indro et al (1999) argue that a high portfolio turnover rate leads to lower fund efficiency

2.3.1.3 Fund’s expense ratio (FER)

In theory, the fund expense ratio is considered a crucial factor influencing fund profitability An increase in the expense ratio implies a reduction in the amount received by investors This corresponds to an increase in transaction costs, management fees, and support services, ultimately affecting the net profit of the fund However, a study conducted by Rehman & Baloch (2015) in Pakistan investigated the impact of various factors on the performance of investment funds The research, encompassing 44 investment funds from 2010 to 2014, revealed that the fund’s

expense ratio (FER) has a positive impact on fund’s performance Previous studies

by Nazir & Nawaz (2010), Afza & Rauf (2009), and Dowen & Mann (2007) also reached similar conclusions

On the other hands, not all studies agree with this perspective Some studies by

Elton et al (1993) and Indro et al (1999) indicated that FER has an inverse effect on

fund’s performance It can be understood that an increase in transaction costs, management fees, and support services does not necessarily translate into improved investment performance, potentially adversely affecting the fund's profitability

2.3.1.4 Net cash flow (NCF)

Net cash flow of the fund is the difference between the cash inflows from investment activities, cash from new investors entering the fund, and cash exiting the fund over a specific period The net cash flow can be positive or negative When the net cash flow is positive, meaning the amount received is greater than the amount

spent, the fund can accumulate and increase its assets This can supplement capital and provide liquidity to acquire additional assets or increase ownership stakes in existing assets

According to a study by Nguyen et al (2018) investigating investor sentiment's impact on the operations of investment funds in the emerging markets of India and

Pakistan, the results indicated that net cash flow (NCF) positively influences fund’s

performance This suggests that when the net cash flow into the fund is positive, the fund has more resources and opportunities to seek better investment prospects, thereby enhancing fund’s performance Similar findings were reported in studies by Gruber (1996) and Zheng (1999) Conversely, research by Dichev (2007) and Glenn & Patrick (2004) demonstrated an inverse relationship, indicating that net cash flow negatively affects fund’s performance

2.3.1.5 Fund age (AGE)

The age of an investment fund plays a crucial role in determining its performance Age is calculated based on the number of months since the fund was established up to the current date The fund's age can impact important factors such as costs and performance A newly established fund often faces higher costs during the startup phase due to the uneconomical nature of the scale Additionally, new funds may struggle to allocate resources reasonably to optimize efficiency while simultaneously building credibility in the market to attract investors

Research by Gregory et al (1997) highlighted that the age of an investment fund can influence operational efficiency, especially in the initial stages This indicates that new funds may encounter challenges and risks distinct from those of longer-established funds Studies by Soeharto & Kisti (2014), Kiymaz (2015), and Bauer et al (2005) have demonstrated the positive impact of fund age on operational efficiency Longer-established funds often exhibit better operational capabilities and achieve higher profits However, a study by Farid & Wahba (2022) on the performance of investment funds in Egypt discovered that age has an inverse impact on fund’s performance This result aligns with prior studies such as Otten & Bams

(2002) Therefore, the correlation between age and fund’s performance is not entirely clear and may depend on various factors

2.3.2 External factors

2.3.2.1 Inflation rate (INF)

Research documents have indicated that the growth of investment funds depends on macroeconomic factors such as GDP growth, inflation, interest rates, and various other elements

Inflation is defined as the sustained increase in the general price level of goods and services Moderate inflation is often associated with stable economic growth, while high inflation is a signal of an economy that is overheating and poses risks The relationship between inflation and the growth of investment funds has been demonstrated in both theory and practice

Coffie (2019) on the impact of macroeconomic factors on the value of investment funds in Ghana showed that inflation, measured by the Consumer Price Index (CPI), does not significantly affect the performance of funds However, Gusni et al (2018), Setiawan & Kanila Wati (2019), and Nurlis (2012) found a positive correlation between increasing inflation and the performance of funds

2.3.2.2 Money supply growth (MSG)

The impact of money supply on the stock market has drawn the attention of economists and has been extensively studied According to the real wealth effect theory, changes in the money supply create changes in the real wealth held by households and business organizations (Laidler, 1969) As a result, changes in aggregate demand affect not only employment, income, and prices but also the profitability of the stock market (Laidler, 1969) Moreover, money supply also influences the portfolio holdings of investment funds and the return rate of managed assets When the money supply increases, the cash flow of investment funds also rises significantly, providing conditions for substantial investments in the capital market and increasing the net asset value of investment funds

However, according to Coffie (2019), changes in the rate of money supply growth do not significantly impact the performance of funds, a result consistent with the findings of Nguyen et al (2018) On the other hand, Karuiki (2014), in a study on “The impact of macroeconomic variables on the financial performance of the investment fund industry in Kenya”, discovered a positive correlation between money supply and fund’s performance This is in line with studies by Ajao & Oseyomon (2010) and Hensawang (2022)

2.4 Overview of some experimental studies on the performance of investment funds and factors affecting the performance of investment funds

2.4.1 Experimental studies in various countries

The relationship between fund activities and fund characteristics has not been extensively studied, particularly in emerging markets where accessing data on investment funds is often more challenging than in developed markets

Indro et al (1999) focused on the impact of fund size on investment efficiency The results showed that investment funds need to achieve a minimum size to ensure sufficient profitability to offset information collection and trading costs Additionally, profit margins tended to decrease when the fund size exceeded the optimal fund size In the sample of 683 funds in the United States during the period from 1993 to 1995, the study demonstrated that the largest 10% of funds invested excessively in data and information collection Furthermore, value funds and blended funds (combining value and growth) provided more benefits than growth funds

Ammann & Moerth (2005) conducted a study on the "Impact of size on the operation of investment funds" The study investigated whether increasing assets in the fund industry reduced profits and whether larger investment funds operated less efficiently than smaller funds, often speculated due to limitations in capabilities in certain fund investment strategies The study analyzed the impact of fund size on profit, standard deviation, and Sharpe ratio The results showed an inverse relationship between fund size and the operational efficiency of investment funds

Notably, this inverse relationship was even stronger for funds holding low-liquidity investment portfolios

Bauer et al (2005) conducted a significant study on the activities of ethical investment funds in Germany, the United Kingdom, and the United States Using the multi-factor Carhart model (1997) and an international database comprising 103 funds, the study expanded and explored new aspects of the nature of ethical investment funds After examining factors related to investment style, the study found limited evidence of significant differences in risk-adjusted returns between ethical investment funds and conventional funds during the 1990 - 2001 period The research suggested that ethical investment funds with a long track record in the market would perform better, while younger or newly established ethical investment funds continued to perform worse than market benchmarks and conventional funds

In a study conducted by Mei-Chen (2006), the Sharpe ratio was employed to examine the influence of factors such as fund size, portfolio turnover rate, net asset value and expense ratio on fund’s performance Results indicated a positive relationship between fund’s performance and net asset value, while revealing a negative correlation with the expense ratio

Yan (2008), which used stock trading data and detailed stock quantity information, a comprehensive study on investment funds managed in the United States from 1993 to 2002 was conducted The aim was to examine the impact of liquidity and investment style on the relationship between fund size and fund’s performance The results showed an inverse relationship between fund size and fund’s performance Specifically, for funds holding less liquid investment portfolios, this inverse relationship was even more pronounced Additionally, the inverse correlation between fund size and fund’s performance was more evident for growth funds and those with high revenue

Suppa-Aim (2010) on investment funds in Thailand, an emerging economy, used diverse datasets and new factors such as investment policies and taxes The study delved into analyzing how fund managers implemented their strategies and

managed their investment portfolios The results indicated that fund size, fund age, and fund flows played important roles in the performance of investment funds, although they did not have statistically significant meaning

Ferreira et al (2013), using data from 27 countries, investigated factors determining the performance of investment funds The study found that investment funds generally underperformed compared to the overall market Results showed significant differences in factors influencing the operational efficiency of funds in the United States compared to other countries worldwide While in the United States, profits decreased with scale, in other countries and foreign funds, an increase in scale did not have a significantly negative impact on fund’s performance The study also emphasized that investment funds performed better in countries with stock markets with high liquidity and solid legal frameworks

In another study, Soeharto & Kisti (2014) examined the influence of fund characteristics and past performance on the performance of investment funds using the Jensen alpha model and a dataset consisting of 33 funds from 2010 - 2013 The results showed that fund size and fund age significantly affected the performance of investment funds, while net asset value did not have statistically significant meaning The financial sector has become an integral part of the societal infrastructure Over an extended period, investment in investment funds has played a crucial role in the financial market, and its prevalence has significantly increased in the past decade Karuiki (2014) investigated the impact of macroeconomic factors on the performance of investment funds in Kenya The research results indicate that money supply, interest rate, inflation rate, and GDP have a positive and substantial influence on the performance of investment funds in Kenya Conversely, exchange rate has a significantly negative impact on the efficiency of fund operations

Amunga (2015) on investment funds in Kenya, a positive relationship was found between fund profitability and the yields of government bonds as well as market interest rates The study identified a negative beta coefficient for factors such as GDP growth rate, inflation rate, and fund size, representing risks in the investment

fund market Moreover, inflation rate, market interest rate, and GDP growth rate had the most significant impact on fund profitability, while a negative relationship was discovered between fund’s performance and investors' behavior To enhance the performance of investment funds in Kenya, the study recommended fund managers apply flexible investment strategies, adjust investment styles regularly, maintain an appropriate fund size, and regularly evaluate fund’s performance against market and other fund benchmarks

Kiymaz (2015) focused on 1,037 investment funds in China from January 2000 to July 2013, exploring fund activities during the period when emerging markets attracted investors' attention The study revealed that factors such as fund age, fund fees, price-to-book ratio, and fund size influenced the operational efficiency of investment funds This study provided valuable information for fund managers in China, helping them better understand the factors determining fund operational efficiency and seize efficient investment opportunities

The study by Rehman & Baloch (2016) provided crucial insights into the operations of investment funds in Pakistan Conducted from 2010 to 2014, the research focused on 44 investment funds operating in Pakistan to understand the influence of various factors on their efficiency The data collected annually from the investment funds' reports and the Pakistan Investment Association were analyzed The study revealed that fund size, management expense ratio, and portfolio turnover ratio all had a positive and significant impact on the performance of investment funds However, liquidity showed a negative and insignificant impact on fund profitability Makau (2016) examined the influence of macroeconomic factors on the performance of listed and licensed funds in Kenya The study period extended from January 2011 to December 2015 The results of data analysis using methods such as Microsoft Excel and SPSS revealed that macroeconomic variables such as interest rate, inflation rate, money supply, and GDP significantly affect the efficiency of fund operations

Gusni et al (2018) concentrated on the performance of equity mutual funds in Indonesia Using the risk-adjusted performance method, the study examined factors influencing fund’s performance, including stock selection skills and timing of fund manager, fund size, and inflation The research selected 19 mutual funds during the period from 2011 to 2015 Data analysis methods were applied to assess the impact of these factors on fund’s performance The results indicated that the operations of mutual funds in Indonesia lacked stability, and fund’s performance was affected by stock selection skills and inflation, while market timing skills and fund size did not have a significant impact

Nguyen et al (2018) analyzed the impact of fund size, expenses, portfolio turnover rate, net cash flow, fund age, market liquidity, and macroeconomic factors such as inflation, interest rates, and GDP on fund’s performance The results showed that fund size and portfolio turnover rate had an adverse effect on fund’s performance, while fund age, expense ratio, and net cash flow had positive effects However, money supply growth and GDP did not reach statistical significance in the model

Setiawan & Kanila Wati (2019) concentrated on factors influencing the performance of Sharia investment funds in Indonesia during 2010 - 2018 The study used the Sharpe ratio to measure fund’s performance and explored internal and external factors affecting the performance of investment funds Internal factors included the stock selection skills of fund managers, market pricing ability, and the rate of managed asset turnover Selected external factors included inflation rates and exchange rate changes The results showed that the stock selection skills of fund managers, the rate of managed asset turnover, and the inflation rate had a positive and significant impact on the operational efficiency of Sharia investment funds On the other hand, market pricing ability did not have a significant impact, while the exchange rate change rate had a significant negative effect on the performance of Sharia investment funds

In addition to the aforementioned studies, Coffie (2019) explored the impact of macroeconomic factors such as inflation, interest rate, exchange rate, money supply,

and GDP growth rate on the performance of investment funds This study identified a positive relationship between exchange rate and the performance of funds, highlighting the favorable influence of exchange rate on the success of investment funds However, macroeconomic factors such as inflation, interest rate, money supply, and GDP growth rate did not significantly affect the operational efficiency of investment funds in the research model

Additionally, Farid & Wahba (2022) focused on investment fund activities in Egypt and employed the Sharpe ratio for evaluation The results revealed that fund size and expenses had a positive impact on fund activities, while fund age had a negative impact Furthermore, the investment fund model did not show significant statistical significance

Hensawang (2022) conducted an analysis of factors affecting the performance of investment funds in Thailand The study used risk-adjusted performance and profitability indices such as Sharpe ratio, Treynor ratio, and Jensen's alpha for evaluation The data sample included 216 randomly selected equity investment funds from 2016 to 2020 The research results showed that liquidity and volatility had a negative impact on fund profitability Fund age, market earnings yield, and inflation also had a negative impact on risk-adjusted performance However, the Sharpe ratio was positively affected by GDP Additionally, money supply had a positive impact on profit, Sharpe ratio, and Jensen's alpha Factors such as portfolio turnover, debt-to-equity ratio, return on equity, management fees, and fund size did not significantly affect fund’s performance This study supported the use of risk-adjusted performance as the impact of these factors is immediate and does not have a lag

2.4.2 Domestic studies

Managing a small investment portfolio for individual investors often incurs unnecessary costs Entrusting this task to a portfolio management expert can be far more beneficial Investment funds offer an optimal solution not only for individual investors but also for businesses and institutions Nguyen Thi Thu Hang (2006) conducted research on the development of stock investment funds demonstrates that