Risk Shifting and Mutual Fund Performance:
A Swedish Perspective
Martin Gustavsson£Johan Riben$
Bachelor’s Thesis
Department of Finance, Stockholm School of Economics
May 21, 2012
善意的谎言
Tutor: Daniel Metzger
Abstract
putclub>take it to the headThis thesis examines the performance conquences of risk shifting in mutual funds on the Swedish market between the years 2000-2011. By constructing a risk shifting measure bad on tracking error volatility, we conclude that the funds that increa risk the most have experienced better performance than funds which decrea or keep stable risk levels over the sample period. We also find that funds th
at engage in risk shifting behavior on average are younger, have less asts under management and charge higher expen rates. We suggest that Swedish fund managers who increa risk the most might have superior stock picking skill and market timing ability to their US colleagues. Key words: Risk Shifting, Fund Performance, Tracking Error, CAPM, Fama-French, Carhart
£ 21638@live.hhs.
$ 21623@live.hhs.
We wish to aim our gratiudes to our tutor Daniel Metzger for valuable input and guidance throughout the writing process. Furthermore, we want to thank Jofine Lantz and Karl Marthon at Morningstar Sweden for help in providing us with data. Finally, we are grateful for the helpful remarks given by Niklas Lyttkens at the final stages of writing.
Table of Contents
1. Introduction (2)
2. Previous Rearch (4)
3. Data (8)
3.1 Data Description (8)
3.1.1 Summary Statistics (10)
3.2 Data Screening and Sorting (10)
3.3 Data Issues (10)
4. Method (11)
4.1 Definition and Construction of Tracking Error (11)
4.2 Construction of the Risk Shifting Measure and Formation of Fund Portfolios (12)
4.3 Performance Measures (14)
4.3.1 Excess Market Return (14)
4.3.2 CAPM (14)
4.3.3 Fama-French three-factor model (14)
曼谷商场李冰冰翻译4.3.4 Carhart four-factor model (15)
四月英语怎么说4.3.5 Regressions (15)
5. Empirical Results (16)
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5.1 Risk Shifting Persistence (16)
5.2 Characteristics of Risk Shifters (16)
5.3 Composition of Risk Shifting Portfolios (17)
5.4 Performance Conquences of Risk Shifting (18)
5.4.1 Excess Market Return (18)
5.4.2 Additional Performance Measures (19)
5.4.3 Long-Term Performance Conquences of Risk Shifting (19)
6. Conclusions (20)
7. Limitations, Discussion and Suggestions for Future Rearch (20)
7.1 Limitations and Discussion (20)
7.2 Suggestions for Future Rearch (21)
8. References (22)
Appendix (26)arms
1.Introduction
A rational investor who faces the classic tradeoff between risk and expected return would ek to maximize return relative to his or her level of risk aversion. Among funds and fund managers there exists many investment strategies that over time have led to different returns through taking positions on different risk levels. The level of risk in mutual funds are of importance to investors as they want to know what return they can expect and how large loss they have to be prepared for. Our thesis aims to contribute to the field of rearch which provides investors with ways to identify funds that are more likely than others to deliver future returns in relation to risk and risk shifting. While our study is conducted using methods that are not immediately available for ordinary investors
死机英文to replicate, our results rve to lend support to previous rearch on fund characteristics, which investors in turn can take into account when investing.
Tangible indicators of superior performance, for example size and expen rate, in mutual funds should reasonably be of great interest to Swedish investors, as savings in funds is central to the nation’s public and private savings. The Swedish market for mutual funds has been growing rapidly since the late 1980’s and early 1990’s when favorable tax-regulations and credit market deregulations made it increasingly more attractive to invest money both domestically and internationally through funds. At the end of year 2011, the total fund asts amounted to 1819 billion SEK. Although this reprents a reduction of 145 billion SEK compared to the previous year, total asts under management in funds have incread from 888 billion SEK since 2010 and from 120 billion SEK in 1990. Approximately 82 percent of Swedish citizens save in funds, and when taking into account saving in the premium pension system nearly the entire adult population saves in funds. Equity mutual funds are the most popular fund type, followed by Mixed funds (investing in equity and bonds) and Fixed Income funds.1
In our thesis, we examine the performance conquences of risk shifting in the Swedish mutual fund market. Huang, Sialm and Zhang (2011)2 write about risk shifting by looking at performance conq
uences using a holdings-bad measure to obrve risk shifting in mutual funds and the subquent effect on performance. Our intention is to replicate parts of the above mentioned article using a data sample of Swedish-bad mutual funds between the years 2000-2011. By replicating this study with Swedish data, we are able to test the implications of risk shifting in a way that has not previously been done
1 Swedish Investment Fund Association, (Fondbolagens Förening).
2Henceforth denoted as HSZ (2011).
in Sweden. We aim at providing an overview of the impact on performance in mutual funds when managers actively alter the level of risk in the managed fund. More specifically, our aim is to recreate parts of the article where results are not dependent on holdings data and parts where it is possible to make minor changes to fit our data. In comparison with rearch conducted in the massively documented US fund market, in terms of data available to rearchers, we face certain limitations when using Swedish data obtained from Morningstar Sweden.3In abnce of comprehensive holdings data for individual funds, we construct an alternative way of measuring risk shifting and apply it to lected tests from the above-mentioned article. The reasoning behind and construction of
this measure is described in detail in the methods-ction of the thesis. With support from established rearch on fund performance, we ba the alternative risk shifting measure on tracking error volatility, i.e. deviation from a funds assigned benchmark. Furthermore, we compare our results to HSZ (2011) in order to discuss similarities and differences between the different markets, as well as confirming the validity of the alternative measure. While not pioneering the u of benchmark indices in fund rearch, we argue that the u of an extensive list of 62 benchmark indices add to the significance of our results.
Our thesis is structured as follows: We begin by reviewing existing literature and previous studies on fund rearch in order to provide the reader with a comprehensive overview of the subject in ction 2, followed by data prentation and summary statistics in ction 3. Section 4 describes our methods ud to differentiate risk shifters and calculate performance measures. Section 5 covers empirical results of performance conquences of risk shifting. Sections 6 and 7 concludes, discuss limitations and offers our suggestions for future rearch. The Appendix lists fund categories and corresponding benchmark indices as well as prents regression tables.
2.Previous Rearch
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The topics surrounding the behavior of mutual fund managers and subquent effect on fund performance have previously been extensively rearched. Numerous studies have been devoted to examining the existence of skilled active managers that are able to persistently outperform the market using superior market timing ability and stock picking skill. Results of studies on the subject are often opposing in their conclusions, but there is an overall view that a small number of fund managers, often obscured in studies by the vast majority, posss superior skills. Kosowski et al. (2006) among others support this view. Carhart (1997) does not support the existence of skilled fund managers and relies on the efficient market hypothesis. Using a rational model of active portfolio management, Berk and Green (2004) find that active managers do not outperform passive benchmarks, but conclude that a majority has at least enough skill to earn back fees. Wermers (2000) supports the prence of stock picking skills in funds and argues that active management is beneficial to investors. On the same topic, Wermers (2003, Working Paper) conclude that fund managers who take larger active management bets show better stock picking skill in the long term, although the average manager tends to underperform their benchmarks. Baks, Metrick and Wachter (2001) conclude theoretically that even skeptical investors will allocate asts into active management. When using daily fund returns instead of monthly, Bollen and Bus (2001) suggest that timing ability in mutual funds might have been understated in previous rearch on the subject.
Similarly, Jiang, Yao and Yu (2007) find positive market timing ability in US domestic equity funds when choosing a measure bad on fund holdings instead of returns. They also find that market timing funds tend to exhibit higher industry concentration. This supports Kacperczyk, Sialm, and Zheng (2005) who suggest greater investment ability among managers holding portfolios that are focud on fewer industries. Furthermore, Elton, Gruber and Blake (2003) relate manager incentive fees in funds with higher stock picking skill.
Another major area of rearch related to mutual funds is the concept that funds that have experienced superior returns to investors in prior periods will continue to outperform and deliver high returns in the future. This also applies to whether or not funds that have underperformed in the past will continue to underperform in the future. In esnce, rearchers are looking at the track record of a fund assuming it contains information about the future performance. Brown and Goetzmann (1995) examine performance persistence in the US market between 1976-1988 and concludes that there is some persistence in relative risk-adjusted performance correlated across
