Copenhagen Business School Copenhagen, Spring 2019 Master Thesis Equity Funds at Oslo Stock Exchange An Empirical Study of Active Management & Performance Martin Staib (107241) Celina Frank (115775) Supervisor: Lars Sønnich Pørksen MSc in Economics and Business Administration Finance & Investments Department of Finance Number of Characters: 159,912 Number of Pages: 87 Date of Submission: 15th of May 2019 Abstract This thesis is an investigation based on assessing Norwegian equity mutual funds, with a focus on active management and performance. The data sample includes 26 mutual funds, whereas 20 are actively managed and six are passively managed, analyzed over a 10-year period from 2009 to 2018. Throughout this research paper, we apply recognized methodologies with modifications, exploring the relationship between active management and performance. Separating our investigations into three parts will enable us to keep contextual cleanliness. First, we evaluated the alpha by applying different regression models through calculations using both a single- and multifactor models. A high alpha indicates that a fund manager is creating additional value beyond what the explanatory variables explain. Our results reflect that, after cost, the funds hardly provide significantly positive alphas. We find an exception of three out of 20 actively managed funds when applying the Single Index model. These vanish in the multifactor model, as the added number of variables rise the degree of explanation for the regression. In addition to investigating the alpha as a measure of additional value created by a fund manager, we split it up by testing for stock picking and market timing ability without finding any significant evidence of market timing ability. The stock picking ability reflects the previous findings of alpha. Second, we consider different performance measures, providing an indication of their performance set up against the benchmark and each other. These measurements provide an interesting result, as we observe that a narrower approach to investment style ends up performing best. Third, we examine the effect of the oil price at the Oslo Stock Exchange. The results show a positive correlation to both the benchmark and the funds, even under the oil price drop in 2014. The investigation also shows a higher correlation between oil price and benchmark in times of an upward cycle. Autocorrelation, heteroscedasticity, normality, and multicollinearity are all checked for before we present the results, leaving us exposed to minor but solvable problems. i Foreword A special thanks is directed to our supervisor Lars Pørksen for counselling, help and support during the process. Furthermore, we would like to thank Private Banker Nils Petter Hansen at DNB for introducing us to this theme, and everyone who have taken their time to read and give feedback. ii Contents Abstract .................................................................................................................................................... i Foreword ................................................................................................................................................. ii List of Figures ......................................................................................................................................... v List of Tables .......................................................................................................................................... v 1. Introduction ......................................................................................................................................... 1 1.1 Background ................................................................................................................................... 1 1.2 Research Questions ....................................................................................................................... 2 1.3 Contribution .................................................................................................................................. 2 1.4 Delimitations ................................................................................................................................. 3 1.5 Structure ........................................................................................................................................ 4 2. Mutual Funds ...................................................................................................................................... 5 2.1 Defining Mutual Funds ................................................................................................................. 5 2.2 Mutual Funds in Norway .............................................................................................................. 7 2.3 Benchmarks in Norway ................................................................................................................. 8 2.4 Regulations ................................................................................................................................... 9 2.5 Mutual Fund Management .......................................................................................................... 11 3. General Theory ................................................................................................................................. 15 3.1 Efficient Market Hypothesis ....................................................................................................... 15 3.2 Returns ........................................................................................................................................ 16 3.3 Capital Asset Pricing Model ....................................................................................................... 18 3.4 Single Index Model ..................................................................................................................... 19 3.5 The Fama-French and Carhart 4-Factor Model .......................................................................... 19 4. Key Figures ....................................................................................................................................... 20 4.1 Performance Measures ................................................................................................................ 21 4.2 Market Timing ............................................................................................................................ 25 4.3 Performance Persistence ............................................................................................................. 25 5. Literature Review .............................................................................................................................. 26 5.1 Research on the American Market .............................................................................................. 26 5.2 Research on the European Market .............................................................................................. 30 5.3 Research on the Norwegian Market ............................................................................................ 30 5.4 Research on the Relationship between Oil Prices and Oslo Stock Exchange ............................. 32 6. Methods ............................................................................................................................................ 33 6.1 Linear regression ......................................................................................................................... 33 6.2 OLS Assumptions ....................................................................................................................... 35 iii 6.3 Robustness check ........................................................................................................................ 36 6.4 Hypothesis Testing ...................................................................................................................... 39 7. Data ................................................................................................................................................... 41 7.1 Selection of Funds ....................................................................................................................... 41 7.2 Benchmark Selection .................................................................................................................. 43 7.3 Return History ............................................................................................................................. 44 7.4 Risk-Free Rate of Return ............................................................................................................ 45 7.5 Fund Expenses ............................................................................................................................ 46 7.6 Information Variables ................................................................................................................. 47 7.7 Survivorship Bias ........................................................................................................................ 47 8. Results ............................................................................................................................................... 48 8.1 Descriptive Statistics ................................................................................................................... 49 8.2