Bulgaria and European Union: A research report

Marieta M.

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Bulgaria and European Union: A research report

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Abstract

The development of a global financial market transforms the individual countries' and domestic capital markets into connected single financial environment, where investors can take advantage of numerous investment opportunities. The dynamic growth and gradual integration of the Bulgarian capital market to the rest of the financial world has posed some important issues about the investment policies of the domestic investors and financial intermediaries. The current dissertation examines the possibilities that the investors can exploit in accordance with the evidences derived from the best practices enhanced by the Western financial world. The performance of some US mutual funds is compared to that of the Bulgarian ones and the relevant investment strategies employed by them are discussed. The major outcomes of this project are related to the efficient market hypothesis and its applicability to the Bulgarian Stock Exchange. In addition, it introduces some reasons for the relative unpopularity of the passive portfolio management and the factors that would turn it into more attractive investment strategy in the near future.

Tags: Transition to democracy in Bulgaria, EU and Bulgaria accession, Bulgaria and EU, Bulgaria EU membership, EU funds to Bulgaria

Abstract
Introduction and rationale
Objectives and research questions
Literature review
1. The main sources of information
2. The discussion about the ability of the various portfolio investment strategies to predict the market performance
3. The EMH (Efficient market hypothesis)
4. The active investment strategies
5. The prophesy-like concept
6. The passive investment strategies
7. The two main investment techniques that reap the benefits of the efficient market
8. The new hybrid version of the known investment strategies
Methodology
1. The choice of the deductive approach
2. The research strategy
Introduction to active and passive investment strategies
1. Passive and active portfolio management
Historical performance of major US and BG mutual funds and the validity of the efficient market hypothesis
1. Performance of major US and BG mutual funds
2. Passive portfolio management and the BG mutual funds
Analysis
1. Active and passive mutual funds performance
2. Historical performance of major US and BG mutual funds and the validity of the Efficient Market Hypothesis
3. Passive portfolio management and the BG mutual funds
Conclusion

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[...] With the present dissertation, I am going to make a research of the historical performance of some major US and Bulgarian mutual funds. As I proceed with this research I will try to explain the validity of the following hypothesis: How does the typical performance of actively managed mutual funds compare to the performance of a passively managed portfolio that simply replicates the composition of a broad index of the stock market? The mutual funds are relatively a new industry in Bulgaria that offers a chance to the small investors to benefit from the stock market through collective investment schemes. [...]

[...] As far as the research approach is concerned the most suitable one for the present dissertation would be a deductive approach in which a theory is first developed and hypothesis and a proper strategy is designed in order to test the validity of the hypothesis. It involves the development of a theory that is subjected to a rigorous empirical test. Moreover it is characterized as highly structured methodology in order to facilitate replication (Gill and Johnson, 1997), an important issue to ensure reliability and validity. [...]

[...] A typical example is the Vanguard Index 500 portfolio; it does not need to pay analysts to assess stock prospects and does not incur transaction costs from high portfolio turnover. Indeed, while the typical annual charge for an actively managed equity fund is more than of assets, Vanguard charges a bit less than for the Index 500 Portfolio. Figure Total expense ratios for the US retail sector (1988 1997) Expense Ratio 500 Index Fund Inv Average Large Blend Fund* Source: The Vanguard Group, Inc Figure 2 - US ETF Asset Growth A hybrid strategy also is fairly common, where an index, such as the Dow Jones Industrial Average or the S&P 500 is replicated by an investment vehicle traded on stock exchanges, much like stocks. [...]

[...] The “fundamentalists” are convinced that the financial report and the news that are constantly appearing about the stock market should be considered as a driving motive into the decision-making of the majority of the investors. All information that is publicly available is immediately assimilated and integrated into the market prices of the stock and they are the main factor moving the stock market and best predictor of the future expectations and feelings of the market players. One particular research of Fama (1972) about the components of investment performance, comments on the methods implemented by the fundamental analysis. [...]

[...] The random walk theory suggests that if the information is uninterrupted and immediately incorporated in stock prices, then tomorrow's price movements would be a reflection of tomorrow's news and would be independent of the price changes today. Since prices are correlated to all available information, uninformed investors buying a diversified portfolio would perform as well as the expert fund managers. Thus, the EMH supports a passive investment strategy. The EMH predicts that enhancing an active investment strategy is a fruitless Performance of major US and BG mutual funds Figure US institutional risk and return profile (1993 -1997 ) Some empirical studies carried out on the performance of mutual funds, in the US (Treynor (1965), Sharpe (1966), Jensen (1968) concluded that expert managers do not tend to perform any better or worse than ordinary investors. [...]

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