Factor Exposure of Danish Mutual Funds: An Empirical Study on the Presence of the Quality Minus Junk Factor

Heidar Ingi Magnusson & Vilhjálmur Maron Atlason

Student thesis: Master thesis


This thesis is concerned with factor investing and the prevalence of the Quality minus junk (QMJ) factor in the Danish mutual fund industry. The Quality minus junk factor was created by Asness, Frazzini, & Pedersen (2013) and utilized in the paper “Buffett’s alpha” (Frazzini, Kabiller, & Pedersen, 2013). The Quality minus junk factor is considered to be a hedge-factor, where it had substantial loading during bad times. In fact, it exhibited market timing characteristics showing investors’ flight to quality during these times. The factor displayed a considerable premium through the years in the original study. The analysis of this study is in three parts. First, we consider the distribution of returns and performance of mutual funds in our sample. Second, we perform regression analysis to determine the significance of the QMJ-factor in our sample. Third, we conduct style analysis of the funds’ investment strategies. We find correlation between the distribution statistics and performance of a fund, and its QMJcoefficient. In general, the higher the QMJ-coefficient of a fund, the better its distribution statistics and performance. Furthermore, we observe evidence of QMJ’s presence in the Danish mutual fund industry. However, the evidence is not conclusive and needs further research. In addition, we did not observe market timing with regards to the QMJ-factor. When conducting the style analysis, we tried to replicate each fund’s returns. In doing so, we managed to outperform the actual returns of the funds by applying their investment strategy to Exchange-traded-funds. The findings would suggest that investors are better off investing in passive index funds rather than active mutual funds.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2018
Number of pages111