Actively Managed Equity Mutual Funds: A Comprehensive of Actively Managed Equity Mutual Funds Evidence from Norway, 2005-2015

Fredrik Bøe Sædberg & Sondre Eng Henriksen

Student thesis: Master thesis


This thesis presents a comprehensive study on actively managed equity mutual funds domiciled in Norway and mainly investing in the Norwegian market, during the period from December 2005 to December 2015. By the use of a survivorship bias free dataset consisting of 47 funds, we aim to elucidate our main problem statement; do actively managed equity mutual funds outperform a passive benchmark in Norway? In addition, we aim to clarify several sub-questions in regards to our main problem statement, conducted by applying a range of well-established and recognized financial models. The entire study is viewed from an investor’s perspective to provide relevant results which are in the interest of any potential investors looking to invest in actively managed Norwegian equity mutual funds. We examine Norwegian fund managers’ stock picking skills, along with market timing abilities by applying single index models. Moreover, we relax the traditional assumption of a constant risk level by introducing additional information variables to our dataset. That is, we investigate mutual fund performance in both an unconditional and conditional setting. Following the analysis of performance and abilities, we examine if the relationship between fund expenses and net performance is in accordance with theory. Furthermore, we investigate if previous well-performing funds tend to continue to perform well and if poor performing funds tend to continue to perform poorly. That is, we implement tests for performance persistence on our dataset. Ultimately, we apply the innovative measure Active Share to our dataset to investigate the relationship between the level of activity and performance. Furthermore, the Active Share measure helps us investigate whether funds are correctly priced and if active investment strategies are more successful than passive investment strategies. Our results suggest that Norwegian actively managed equity mutual funds do in fact outperform a passive benchmark on average. However, there is a clear tendency that the funds’ fees erase the outperformance. That is, the investors do not benefit from active management. Moreover, we do find evidence of some fund managers displaying superior stock picking abilities and of some managers displaying superior market timing abilities. However, we do not find evidence of both abilities being present at the same time, which would be the type of fund being most appealing to investors. On the other hand, we do find evidence of some fund managers displaying negative stock picking skills and some managers displaying negative market timing abilities. Nevertheless, these capabilities are not present at the same time. In terms of performance and fund expenses, we find evidence of the cheapest funds being the best performers on average, which is in direct contrast with theory. Furthermore, we are not able to detect any pieces of evidence of performance persistence among Norwegian actively managed equity mutual funds. Hence, a strategy where an investor buys previous winners will not automatically lead to abnormal returns in subsequent periods. Similarly, an investor buying past losers would not automatically receive below average returns in subsequent periods. When applying the Active Share measure, we find that the majority of funds claiming to be active are truly passive. Moreover, there is no relationship between the level of activity and performance. In fact, the least active funds in our sample perform better than the most active. Moreover, the most active funds seem to be the most expensive on average, which is in accordance with theory. However, looking at individual funds, this is not always true, as this implies that an investor could be in danger of paying for active management but receiving passive management. Ultimately, we find no evidence for active investment strategies performing better than passive investment strategies. In total, our results indicate that investors in Norwegian actively managed equity mutual funds do not receive the product and return they are paying for.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages138