Sizing up Your Portfolio Manager: Mutual Fund Activity & Performance in Sweden

Sammanfattning: We examine the characteristics of active management and its effects on performance among Swedish equity mutual funds investing in the Nordic region. In line with Fama (1972), we consider stock selection and factor timing to distinguish between different aspects of active management. Based on holdings data between 2003 and 2011, we apply a methodology developed by Cremers and Petajisto (2009) and categorize funds according to Active Share and tracking error. We find evidence for differences in active management styles that cannot be recognized using conventional measures of active management. Further, it seems like those differences can be linked to fund performance. The results show that tracking error is negatively related to future returns with statistical significance, suggesting that factor bets are not rewarded in the market. Some evidence for a positive correlation between Active Share and performance persistence in fund returns is also found. For investors, this would mean that there is more to consider than the traditional measures of active management in fund selection. This is especially true when comparing fund performance between stock pickers and factor bets, two active management styles that are almost impossible to distinguish between using tracking error alone.