Actively Managed Mutual Funds. Value Creation and Performance Determinants: An Empirical Investigation of Nordic, Actively Managed Mutual Funds’ Stock Picking and Market Timing Abilities – and whether Performance Determinants can be an Explanatory Factor of the Mutual Funds’ Risk-adjusted Excess Return

Casper Brochmann Hansen & Christoffer Larsen

Student thesis: Master thesis


This thesis investigates the performance of 261 Nordic, actively managed mutual funds in the period
January 2005 to December 2018 using a survivorship bias free data set. The study examines whether
the market is efficient, or the mutual funds are able to generate a risk-adjusted excess return compared
to a passive benchmark. The study is comprehensive and addresses the stock picking and market timing abilities of the mutual funds. In addition, it is investigated whether the Nordic funds exhibit short-term persistence in performance. The purpose of the study is to investigate whether performance determinants can be an explanatory factor of the mutual funds risk-adjusted excess return and hence can be exploited in a strategy that improves the identification of future outperforming mutual funds.
The study finds that the actively managed mutual funds generate a risk-adjusted excess return of 1,38% gross of fees, however, it corresponds to the cost level of the mutual funds. Hence, on an aggregate level, the mutual funds perform neutral net of fees. Further, the study finds that mutual funds do not possess the ability to time the market. The evidence supports the findings of Grossman and Stiglitz (1980) who argue that informed investors are able to generate excess returns, but only enough to cover their expenses. The study shows that some funds have been able to significantly outperform the market on a short-term basis at the expense of other actively managed mutual funds.
The thesis finds that the APB-adjusted alpha approach can be used to identify funds that generate a
higher risk-adjusted excess return relative to their style peer group. It is shown that the APB-factor
significantly improves the identification of future outperforming mutual funds. In addition, the study
finds that the mutual funds’ turnover and Tracking Error significantly explain the variation in the riskadjusted return in the following period. This leads to the derivation of a strategy that (insignificantly) generates an annual risk-adjusted excess return that is 0,58% above the excess return of the equallyweighted portfolio of actively managed mutual funds.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages117