Studying the Effective Factors of Investors ' Sensitivity towards Performance and Price of Investment Funds in Tehran Stock Exchange

Considering that the investment funds in Tehran Stock Exchange started their activity during the last five years and tendency of real and legal investors to invest in such funds, studying the relationship between goodwill and ranking of funds as effective factors on investors' sensitivity towards performance and price of investment funds has been focused in this study. Therefore, twenty two and thirty six funds were investigated in 2011 and 2012 respectively. The ranking factor is in the form of two variables of high ranking and low ranking as well as four factors under study as four representatives of goodwill including inter-group ranking score of funds, size, the fund's age and bank. Data analysis was conducted through cross-functional structure with fixed effects and ordinary least squares (OLS) method. The results confirm the significant linear relationship among the variables of fund age, bank and inter-group ranking score with investors' sensitivity towards price. This relationship was just confirmed between investors' sensitivity towards performance with fund age and bank variables. Also, the relationship between ranking of funds and investors' sensitivity towards performance and price of funds has been confirmed. Introduction The number of the investment funds has been increased annually since 2008 when these funds were launched through the license given by Karafarin Bank following the desire of the authorities of the stock market in Iran and its startup in 2009. Now there are more than 80 funds in Tehran Stock Exchange that is the symbol of capital market in Iran The investment funds have been appeared in England in 18 century; but growth and development of the funds in the modern form dates back to 1924 in Boston, US. In Iran, these funds are similar to those existing in other countries in many respects and in some cases they are different. Most differences are related to the administration manner of funds and their diversification in other countries. Funds have units of investment that are purchased by investors or are sold to the fund itself. This kind of buying and selling that is different from International Journal of Academic Research in Business and Social Sciences April 2014, Vol. 4, No. 4 ISSN: 2222-6990 260 www.hrmars.com stock trading of the investment companies is referred to as issuance and revocation of the unit of investment. There is no second hand market to issue and revoke the units of investment and whenever the investor wants to sell his/her units, the fund should revoke its unit of investment and the fund's guarantor should return the intended cash to the investor. Price of each unit of the fund is determined with the Fund's NAV at the end of the day after the stock exchange is closed. In order to enter the fund, the investor refers to the investment fund (visually, virtually or through telephone call) and requests for issuance of a unit of investment or revocation of his/her units if he/she wants to exit the fund. The investment funds have variable capital and demand level of issuance and revocation of the unit of investment changes their capital level. This is different for the investment companies whose capital is increased through certain legal formalities. Theoretical framework To calculate the investors' sensitivity, first the investment flows should be calculated. Net investment flow is obtained via the following relation (Gil-Bazo & Ruiz-Verd, 2009): Flowit =[TNAit – TNAit-1(1+rit)] / TNAit-1 In this equation, Flowit is net investment flow of fund i in period t; TNA is net sum of assets of the fund and net purchases and sales is calculated at the end of day; rit is return rate of the fund i or performance in day t in comparison with the previous day that is obtained through the following relation (Saeidi et al., 2011): ri = (NAVit – NAVit-1) / NAVit-1 Then, the measurement model of investment flow should be proposed based on the effective factors on investors' sensitivity (Navone, 2012). By investors' sensitivity, we mean the changes created in investment flows due to the changes in the intended factors. When an investor wants to invest in a fund, he/she considers some factors given to his/her individual characteristics and time requirements and evaluates certain standards. Performance or return rate of previous period(s), loads paid for entering the fund or exiting it, the fund's background, ranking status of the fund among other funds at present and in previous periods, liquidity of the fund and its average value, rewards paid to the managers and so on are the most important standards that are considered by investors at the investment time or when they exit the fund. Investors show less sensitivity towards some of these standards and perhaps they have more sensitivity towards some other. The investor who believes that rewards of managers are a negative factor in earning the fund's return shows more sensitivity towards the fund's price. A major part of this price is composed of employment expenses of the manager. In contrast, another group of investors believe that rewards of managers are directly related to the fund's return. Professional rewards are for professional managers and earning the highest returns depends on employment of professional managers. Therefore, this group of investors should have less sensitivity towards the fund's price or cost ratios but more sensitivity towards the fund's performance and gaining high rankings. Another component of cost ratios is brokerage load fund that the fund receives from the investor when he/she enters or exits. The investor's consecutive entering and exiting means to lose one part of his/her capital as brokerage load. Degree of sensitivity of investors towards such seemingly insignificant prices has a direct effect on investment flows (Wilcox, 2003). In order to maintain their investors, the funds decrease back-end loads with regard to the number of years of maintaining the units of investment by International Journal of Academic Research in Business and Social Sciences April 2014, Vol. 4, No. 4 ISSN: 2222-6990 261 www.hrmars.com the investor so that if an investor has maintained a unit of investment for seven years, he/she is dispensed with payment of loads. This can be very vital for that group of investors who have more sensitivity towards external load payment and the load to enter another fund that is led to maintenance of their investment. The conducted studies (Navone, 2012; Christoffersen, 2007) indicated that many investors act unprofessionally and are deceived by the exaggeration and goodwill of funds and indemnify the misprofessionalism of funds' managers. Research background Navone (2012) in a comprehensive study showed that sensitivity of investors towards performance and price of funds is related differently to the fund's goodwill. Also he documented while sensitivity of investors towards performance is increased monotonously with the previous performance, their sensitivity towards price is not the same. Gil-Bazo and Ruiz-Verd (2009) tried to explain the negative relationship between high performance and cost ratios and finally concluded that the funds with the expected lower performance are classified as higher cost funds which are the target of performance sensitivity of investors. Also, performance sensitivity indicates price sensitivity. Choi et al. (2007) have concluded that investors do not consider costs simply as a negative element of gross yield and they evaluate previous performance and cost ratios separately when choosing a company. Evidences reveal that relative importance of these two information elements, i.e. previous performance and cost ratios are different among the investors and structural factors of population such as age, gender, education and training are effective on it. Huang et al. (2007) concluded that if costs of searching for information and information availability are effective on how investors react towards previous performance, it has a stronger effect on the expected sensitivity of investors towards price. Wilcox (2003) conducted an empirical study and represented various investment portfolios to 50 consumers and asked them to choose the highest performances of the fund. He showed that investors pay less attention to costs than performance standards and there is an important relationship between management expenses with ratio of previous performance that is highly affected by population indexes. Being wealthy, high education level and high financial understanding of investors can be referred to as the population indexes and finally previous performance is more important then the cost. In a research about the relationship between gross performance of the fund and the price paid by investors, Musto and Christoffersen (2002) documented a negative relationship. They concluded that the stock of funds with low quality performance is purchased by those who have less sensitivity towards performance. In contrast, with regard to higher level funds in terms of performance, the stock is purchased by those who have more sensitivity towards performance. This is while there are reverse sensitivities towards cost. Saeidi and Saeidi (2011) concluded that there is a significant correlation between cash flow of funds and market return. This correlation is stronger for capital inflow towards capital outflow and net flow. Similarly, no evidences were found in monthly data analysis regarding that the current or market return has a significant effect on capital flow. About non-simultaneous relations, the process of revocation follows an interval preceding the market return. Also they studied weekly information and documented that the cash flow of funds is affected by market International Journal of Academic Research in Business and Social Sciences April 2014, Vol. 4, No. 4 ISSN: 2222-6990 262 www.hrmars.com return unlike monthly time intervals. Investors in investment funds react positively towards


Introduction
The number of the investment funds has been increased annually since 2008 when these funds were launched through the license given by Karafarin Bank following the desire of the authorities of the stock market in Iran and its startup in 2009.Now there are more than 80 funds in Tehran Stock Exchange that is the symbol of capital market in Iran The investment funds have been appeared in England in 18 th century; but growth and development of the funds in the modern form dates back to 1924 in Boston, US.In Iran, these funds are similar to those existing in other countries in many respects and in some cases they are different.Most differences are related to the administration manner of funds and their diversification in other countries.Funds have units of investment that are purchased by investors or are sold to the fund itself.This kind of buying and selling that is different from stock trading of the investment companies is referred to as issuance and revocation of the unit of investment.There is no second hand market to issue and revoke the units of investment and whenever the investor wants to sell his/her units, the fund should revoke its unit of investment and the fund's guarantor should return the intended cash to the investor.Price of each unit of the fund is determined with the Fund's NAV at the end of the day after the stock exchange is closed.In order to enter the fund, the investor refers to the investment fund (visually, virtually or through telephone call) and requests for issuance of a unit of investment or revocation of his/her units if he/she wants to exit the fund.The investment funds have variable capital and demand level of issuance and revocation of the unit of investment changes their capital level.This is different for the investment companies whose capital is increased through certain legal formalities.

Theoretical framework
To calculate the investors' sensitivity, first the investment flows should be calculated.Net investment flow is obtained via the following relation (Gil-Bazo & Ruiz-Verd, 2009): In this equation, Flow it is net investment flow of fund i in period t; TNA is net sum of assets of the fund and net purchases and sales is calculated at the end of day; r it is return rate of the fund i or performance in day t in comparison with the previous day that is obtained through the following relation (Saeidi et al., 2011): ri = (NAVit -NAVit-1) / NAVit-1 Then, the measurement model of investment flow should be proposed based on the effective factors on investors' sensitivity (Navone, 2012).By investors' sensitivity, we mean the changes created in investment flows due to the changes in the intended factors.When an investor wants to invest in a fund, he/she considers some factors given to his/her individual characteristics and time requirements and evaluates certain standards.Performance or return rate of previous period(s), loads paid for entering the fund or exiting it, the fund's background, ranking status of the fund among other funds at present and in previous periods, liquidity of the fund and its average value, rewards paid to the managers and so on are the most important standards that are considered by investors at the investment time or when they exit the fund.Investors show less sensitivity towards some of these standards and perhaps they have more sensitivity towards some other.The investor who believes that rewards of managers are a negative factor in earning the fund's return shows more sensitivity towards the fund's price.A major part of this price is composed of employment expenses of the manager.In contrast, another group of investors believe that rewards of managers are directly related to the fund's return.Professional rewards are for professional managers and earning the highest returns depends on employment of professional managers.Therefore, this group of investors should have less sensitivity towards the fund's price or cost ratios but more sensitivity towards the fund's performance and gaining high rankings.Another component of cost ratios is brokerage load fund that the fund receives from the investor when he/she enters or exits.The investor's consecutive entering and exiting means to lose one part of his/her capital as brokerage load.Degree of sensitivity of investors towards such seemingly insignificant prices has a direct effect on investment flows (Wilcox, 2003).In order to maintain their investors, the funds decrease back-end loads with regard to the number of years of maintaining the units of investment by the investor so that if an investor has maintained a unit of investment for seven years, he/she is dispensed with payment of loads.This can be very vital for that group of investors who have more sensitivity towards external load payment and the load to enter another fund that is led to maintenance of their investment.The conducted studies (Navone, 2012;Christoffersen, 2007) indicated that many investors act unprofessionally and are deceived by the exaggeration and goodwill of funds and indemnify the misprofessionalism of funds' managers.Navone (2012) in a comprehensive study showed that sensitivity of investors towards performance and price of funds is related differently to the fund's goodwill.Also he documented while sensitivity of investors towards performance is increased monotonously with the previous performance, their sensitivity towards price is not the same.Gil-Bazo and Ruiz-Verd ( 2009) tried to explain the negative relationship between high performance and cost ratios and finally concluded that the funds with the expected lower performance are classified as higher cost funds which are the target of performance sensitivity of investors.Also, performance sensitivity indicates price sensitivity.Choi et al. (2007) have concluded that investors do not consider costs simply as a negative element of gross yield and they evaluate previous performance and cost ratios separately when choosing a company.Evidences reveal that relative importance of these two information elements, i.e. previous performance and cost ratios are different among the investors and structural factors of population such as age, gender, education and training are effective on it.Huang et al. (2007) concluded that if costs of searching for information and information availability are effective on how investors react towards previous performance, it has a stronger effect on the expected sensitivity of investors towards price.Wilcox (2003) conducted an empirical study and represented various investment portfolios to 50 consumers and asked them to choose the highest performances of the fund.He showed that investors pay less attention to costs than performance standards and there is an important relationship between management expenses with ratio of previous performance that is highly affected by population indexes.Being wealthy, high education level and high financial understanding of investors can be referred to as the population indexes and finally previous performance is more important then the cost.In a research about the relationship between gross performance of the fund and the price paid by investors, Musto and Christoffersen (2002) documented a negative relationship.They concluded that the stock of funds with low quality performance is purchased by those who have less sensitivity towards performance.In contrast, with regard to higher level funds in terms of performance, the stock is purchased by those who have more sensitivity towards performance.This is while there are reverse sensitivities towards cost.Saeidi and Saeidi (2011) concluded that there is a significant correlation between cash flow of funds and market return.This correlation is stronger for capital inflow towards capital outflow and net flow.Similarly, no evidences were found in monthly data analysis regarding that the current or market return has a significant effect on capital flow.About non-simultaneous relations, the process of revocation follows an interval preceding the market return.Also they studied weekly information and documented that the cash flow of funds is affected by market www.hrmars.comreturn unlike monthly time intervals.Investors in investment funds react positively towards market return.Saeidi et al. (2011) examined 20 funds in a study and investigated the effects of ten factors.Then they confirmed a significant linear relationship among six variables including market return, growth rate of fund value, absolute value of deviation from average fund return, value of issuing the units of investment, ratio of fund's activity, issuance value of the units of investment with return of investment funds and showed that there is a relationship among market return, risk, ratio of activity, capital and return of the previous period with fund's return.According to Pourzamani et al. (2011), there is a positive and significant correlation among fluctuations of the fund return up to previous period, return of the fund's previous period, fund's age, rate of assets turnover under the fund's management up to the previous period and the return earned by fund.Also evidences indicated that there is a significant difference among properties managed by the fund in the previous period, fund costs, growth rate of new money with regard to previous period and fund return.

Hypotheses
The hypotheses are as follows: Hypothesis 1: Goodwill is effective on sensitivity of investors towards the fund's price.Hypothesis 2: Goodwill is effective on sensitivity of investors towards the fund's performance.Hypothesis 3: Fund ranking is effective on sensitivity of investors towards the fund's price.Hypothesis 4: Fund ranking is effective on sensitivity of investors towards the fund's price.In the following, research models are presented; independent variables are introduced and it is explained why relations among the variables are predicted as research hypotheses.The model is generalized based on performance, cost ratios of the fund, high and low ranking variables of the fund and four criterions of goodwill, i.e. bank, inter-group ranking, size and age.In order to increase accuracy, interaction of each variable is included in the model too.PERF-sens it : sensitivity of the investor towards fund's performance i in period t via derivation of the measurement model of investment flow with regard to performance (perf) PRIC-sens it : sensitivity of the investor towards fund's price i in period t via derivation of the measurement model of investment flow with regard to price (pric) Perf it-1 : performance or return of fund i in period t-1 (NAV it -NAV it-1 )/NAV it-1 where NAV is net value of fund assets that is calculated monthly.Exp it-1 : price or cost ratios of fund i in period t-1 It is current costs of the fund that includes employment expenses of the fund's manager, administrative expenditure, front-end loads and back-end loads with a slight difference in funds

International Journal of Academic Research in Business and Social Sciences
April 2014, Vol. 4, No. 4 ISSN: 2222-6990 263 www.hrmars.comand exists in periodical and annual financial statements of funds.It is obtained through dividing sum of the above-mentioned costs by net properties.Mid: Symbol of low rank fund It is a dummy variable that if the fund is ranked in bottom one-third of ranking, it will be equal to 1; otherwise, it will be equal to zero.This variable shows funds with low ranking.Ranking is done annually.High: Symbol of high rank fund It is a dummy variable that if the fund is ranked in upper one-third of ranking, it will be equal to 1; otherwise, it will be equal to zero.This variable shows role of the funds with high ranking.Ranking is done annually.Size: It is natural logarithm of assets under management that is calculated monthly (the last day of each month is the criterion for calculation).Age: It is natural logarithm of fund's age that is calculated daily until the end of each month.Bank: It is a dummy variable that if the fund's name is accompanied by the name of a public or private bank at the beginning or ending, it will be equal to 1; otherwise, it will be equal to zero that is fixed during the research period.Iccat: inter-group ranking It is a weighted score and a number between zero to ten and is related to ranking of each fund that is calculated annually through its specific calculations.To calculate sensitivity of investors towards performance and price (cost ratios), derivation of the above model is calculated separately with regard to each factor of high and low ranking and four representatives of goodwill.The four following models are obtained which are used for testing of hypotheses.Price-sens it = β 0 + β 1 size it + β 2 age it + β 3 bank it +β 4 iccat it + ε it This model was proposed to test the first hypothesis and is the derivation of the primary model of investment flow with regard to price factor (cost ratios) and measures sensitivity of investors towards price in relation to the fund's goodwill.Perf-sens it = β 0 + β 1 size it + β 2 age it + β 3 bank it +β 4 iccat it + ε it This model was proposed to test the second hypothesis and is the derivation of the primary model of investment flow with regard to performance and measures sensitivity of investors towards performance in relation with the fund's goodwill.Price-sens it = β 0 + β 1 MID it + β 2 High it + ε it This model was proposed to test the third hypothesis and is the derivation of the primary model of investment flow with regard to price factor (cost ratios) and measures sensitivity of investors towards price in relation with high and low ranking.Pref-sens it = β 0 + β 1 MID it + β 2 High it + ε it This model was proposed to test the fourth hypothesis and is the derivation of the primary model of investment flow with regard to performance and measures sensitivity of investors towards performance in relation with high and low ranking.

Statistical population and sample
The statistical population included all investment funds which have activity license from the Stock Exchange Company and were permanently active in 2011 and 2012.Monthly time periods were used and the data were collected cross-functionally and separately for 12 months in 2011 and 2012.Then data were studied and the results of both years were compared.Thus, the number of funds in 2011 was equal to 22 and in 2012 was equal to 36 funds.The number of observations in 2011 and 2012 was equal to 264 and 432 respectively (name of the funds are displayed in Table 1, the first 22 funds were tested in 2011 and all 36 funds were tested in 2012).