Performance evaluation of Skagen Kon-Tiki and some emerging market funds, with an emphasis on the funds’ performance relative to the underlying risk
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The financial markets are as complex as ever due to an accelerating development in technology and complex financial instruments available to investors. This has contributed to the world becoming more financially integrated, which has affected the risk picture for finance. This along with other factors has resulted in that the financial industry is facing some different challenges related to risk. The financial institutions and banks form an essential part of the community, and lay the foundation for the economic interaction in the markets. It is therefore important that the financial industry incorporate sufficient tools to understand and manage the risk associated with their products. The main purpose of this thesis was to perform a mutual fund evaluation for Skagen Kon-Tiki and some emerging markets funds, with an emphasis on the funds’ performance relative to the underlying risk. To perform the evaluation, finance theory, fundamental statistics and modern portfolio theory was applied. Three sub-objectives were added to supplement the main purpose and to clarify the evaluation focus. The first sub-objective was related to the funds returns, ignoring the risk. The second sub-objective was to evaluate the funds returns relative to the risk, and the third sub-objective was to evaluate the funds relative to the risk. To perform a quantitative fund evaluation, a series of methods was used to measure the funds’ performance. The evaluation was performed over a period ranging from the start of 2002 till the end of 2012. A total of 4 mutual funds and benchmark was selected, and used in the performance evaluation. The results from four of the methods were presented, discussed and a ranking of how the funds performed provided. The results were divided into three periods, to better understand when the funds perform well, and poorly. At the end, a summary of the methods rankings was presented to give an overview of how the funds overall performed. To ensure that there was a significant difference between the funds results, a statistical test was performed for each ranking. After the test, a new ranking was provided ensuring evaluation presented the true performance of the funds. To aid in managing the challenges the financial industry are facing, it is proposed to use Avens (A,C,U) perspective as a tool to incorporate the uncertainty. A qualitative evaluation was performed to incorporate this perspective. This provided a more complete evaluation and shed light on the uncertainty perspective that is often neglected in fund evaluations. Three sources of epistemic uncertainty were assessed for the evaluation. The completeness uncertainty, model uncertainty and parameter uncertainty were assessed for the three sub-objectives. This provided the basis for the qualitative evaluation. Overall, the evaluation indicated that Skagen performed best of the selected funds over the complete period, it was therefore concluded that Skagen deserves its current gold rating by Morningstar. JPM and MSCI performed second best, and it was concluded that JPM deserves its rating of silver. Fidelity performed moderately, obtaining the fourth position in the rank. Based on the overall evaluation, it was concluded that the fund deserved its current bronze rating. DNB was the fund that performed worst overall.
Master's thesis in Risk Management