The True Activity Levels of Norwegian Actively Managed Equity Mutual Funds: An Empirical Answer to the Medias’ Critique of the Actively Managed Fund Industry

Fredrik Bøe Sædberg

Student thesis: Master thesis


By applying a wide range of activity measures and performance tests, both in a static risk scenario and a time-varying risk scenario, on a sample consisting of 38 actively managed Norwegian equity mutual funds, this quantitative study aims to answer the recent debate that has roared the Norwegian media. The actively managed fund industry has been criticized for not being active enough and delivering an inferior product to what the investors are paying for. By applying Cremers and Petajisto’s active share measure in combination with the tracking error, this study elucidates if closet-index funds are a prominent issue in the Norwegian market. Unfortunately, the overall findings are disappointing; approximately 60% of the funds in the sample are classified as closet-indexing. That is, more than half of the available actively managed equity mutual funds in Norway are in fact trailing a benchmark index, and thus delivering a highly passive product. In addition, the 38 funds’ performance is analyzed in the period from 1 January 2006 to 31 December 2015 by applying a set of performance tests derived directly from the CAPM framework. By applying the traditional Jensen’s alpha regression for micro forecasting abilities, and the Treynor & Mazuy market timing model for macro forecasting abilities, I am able to compare activity levels and performance, along with managerial abilities. In addition to the traditional performance tests, this study follows Ferson & Schadt’s approach of analyzing performance in a time-varying risk scenario, in order to portray a more realistic picture of the risk levels and help mitigate omitted variable bias. However, I find no evidence of a relationship between activity levels and performance or between activity level and managerial abilities. In fact, I identify an inverse relationship between activity levels and performance. The least active funds perform better on average than the more active funds. Moreover, there are more evidence of superior forecasting abilities among the least active funds than the more active funds, which is exactly opposite of what you would expect, taking into account that active fund management is resource intensive, and thus a pricy product. Ultimately, the activity levels are compared to the funds’ TER, in order to elucidate whether the relationship between activity levels and costs are according to theory. Yet again, this study provides disappointing results from the actively managed fund industry’s point of view, as there seems to be an irrational relationship between activity levels and costs. According to the findings in this study, the investors investing in actively managed Norwegian equity mutual funds are actually overpaying for the product and performance they receive, which supports the critics’ accusations.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages79