Scale and Skill in Mutual Fund Management: Evidence from Norway

Markus Snøve Høiberg

doi:10.33215/sjom.v3i4.351

Abstract

Using a sample free of survivorship bias and several risk-adjusted performance benchmarks to identify effects of scale on mutual fund performance in the Norwegian market, I find mixed evidence that both large and small funds underperform as against the middle-sized funds in the period 2005-2018. Controlling for relevant factors in panel data regressions, I find that, on average, performance worsens with an increase in size while giving support to initial findings of nonlinearity. The relationship is most robust after 2013 and seems to be affected by competition in the market as well as fund inflows. I do not find any empirical evidence to support the liquidity hypothesis.

Highlights

The Norwegian Mutual Fund industry has been growing at remarkable rates since the financial crisis of 2008 due to low-interest rates, new pension regulations, and increased availability and knowledge (VFF, 2018)
Investors choose to trust managers in allocating their assets. This paradox has puzzled practitioners and researchers alike for years, bringing mainly two questions: Why do active funds underperform their benchmarks? And why do investors still choose them? This study aims to increase understanding by answering the following two questions: Does the size of a fund’s asset base affect risk-adjusted performance among Norwegian mutual funds investing in Norwegian equities? Are there any factors affecting the relationship between size and performance?
This paper empirically analyzes the relationship between performance and size of Norwegian mutual funds and contributes with an increased understanding of several drivers of the performance

Summary

Introduction

The Norwegian Mutual Fund industry has been growing at remarkable rates since the financial crisis of 2008 due to low-interest rates, new pension regulations, and increased availability and knowledge (VFF, 2018). This raises the question of how stakeholders adapt to the increases in scale and should be of particular concern for investors trying to pick the best performing mutual funds. Investors choose to trust managers in allocating their assets This paradox has puzzled practitioners and researchers alike for years, bringing mainly two questions: Why do active funds underperform their benchmarks? This paradox has puzzled practitioners and researchers alike for years, bringing mainly two questions: Why do active funds underperform their benchmarks? And why do investors still choose them? This study aims to increase understanding by answering the following two questions: Does the size of a fund’s asset base affect risk-adjusted performance among Norwegian mutual funds investing in Norwegian equities? Are there any factors affecting the relationship between size and performance?

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Conclusion