Mutual fund performance - Explaining the performance of Swedish domestic equity mutual funds using different fund characteristics.

Abstract

Background: In Sweden mutual funds alone account for SEK 1 trillion as of today. This is a doubling in wealth in only 7 years. For decades people have tried to come up with successful trading strategies enabling them to beat the market. Since mutual funds have become popular the research has also started to include ways of finding the right mutual funds. Academics continuously try to find characteristics influencing mutual fund return. Choosing the right mutual funds can have considerable effects on investors’ ending wealth; one percent each year in 30 years can imply a huge amount. Since the influence on accumulated wealth is enormous it would be preferable if fund investors could evaluate managers based on known characteristics influencing return.

Purpose: The aim of this thesis is to investigate whether an investor can find fund attributes influencing return, which can give him indications about future performance.

Definition: When mutual funds or funds are used in this thesis only equity mutual funds are considered; accordingly fixed income funds, mixed funds or other special funds are not considered.

Methodology: Extensive research exists in our subject of interest; however academics have attained divergent results. In our study hypotheses are defined regarding those attributes most frequently used by finance academics. The hypotheses are being tested by performing several regression analyses, both simple and multiple. By accepting or rejecting the hypotheses we find out if earlier studies, mainly from the U.S., are applicable on Swedish mutual funds. Our empirical data exists of secondary sources mainly collected from each mutual fund’s annual report. Data is also collected from the Six Trust Database and by e-mailing different mutual fund companies. The study covers the period 2000-01-03 – 2004-12-31 and only includes mutual funds invested in domestic securities.

Data: A huge body of financial articles concerning the subject of mutual fund performance have been studied before performing the study. These articles are mainly derived from the U.S. and financial professionals diverge in their results concerning which attributes that influence return.

Result: Our study shows that the attributes having some impact on mutual fund return are risk, size, age and mutual fund tenure. Risk was shown to have the greatest influence on return as expected.