Is it worth getting active? A study on active share and fund performance in Sweden

Sammanfattning: The occurrence of closet index funds has been widely debated in Sweden in recent years. This study examines whether a higher level of mutual fund activity, measured by the two fund activity measures active share and tracking error, correlates with higher fund returns. Using a sample of 75 Swedish all equity mutual funds and three major benchmark indices, both Large and Small/Mid Cap, over the ten-year period of 2007-2016, we perform panel data regressions controlling for year fixed effects. We include two supplementary variables in the regressions as well; market capitalization and fund age. The results show that tracking error is significantly correlated with active share. We find that active share has a small and positive correlation with fund return, while tracking error has no significant effect on return. Regarding the level of activity we find that Swedish mutual funds are becoming more truly actively managed, and the degree of closet indexing is decreasing. The average level of active share has increased from 50.46% to 60.61% over the time period, while the proportion of truly active funds has increased from 28.89% to 50.72%.