Abnormal Returns of Swedish Equity Funds : Are Managers Skilled or Lucky?

Sammanfattning: The fund market has grown substantially during the past decades and the majority of Swedish citizens are invested in funds directly or through pension savings. There is mixed evidence on the performance of Swedish equity funds depending on the method employed and the time period studied. In this study, we set out to estimate abnormal performance using acknowledged methods during a time-period that is both longer and more recent than previous studies. Our sample is survivorship-free and consists of 150 mutual equity funds during January 1993 to December 2011. We use a four-factor model to estimate abnormal performance compared to an index and additional risk factors. We find that the average performance is neutral net of costs and that funds outperform with 1.7 percent before costs, the difference is approximately the average management fee. Over time, we find that the average abnormal performance and the share of funds that have significant outperformance have decreased while the share of significant underperformance has increased. Since the study of fund performance started in the 1960's the twin questions has been; does funds outperform the market and is this a result of pure chance or are managers skilled? Since we observe funds with significant positive and negative abnormal performance, we want to know if the results can attributed to luck or skill. We employ the latest technique, a bootstrap simulation, to test for skill or luck. This is the first study to employ the bootstrap to distinguish skill from luck in sample of Swedish funds. By ranking funds on performance after costs, we find that the performance of the majority of funds can be attributed to skill or "bad skill". The evidence is strongest in the top 95th percentile and above, and from the bottom 50th percentile and below.