Performance, persistence and business cycle asymmetries in Norwegian mutual fund returns: do mutual funds perform when it matters the most?

Abstract

This paper investigates the performance, persistence, and business cycle asymmetries in active Norwegian mutual funds using a dataset free of survivorship bias between 1983 and 2014. Fund performance is evaluated using both unconditional and conditional versions of Carhart’s (1997) four-factor model. To determine the statistical significance of our result, we adopt a cross-sectional bootstrap methodology. We find that actively managed Norwegian mutual funds on aggregate produce returns that underperform the four-factor benchmark net of costs. When we examine individual funds, our bootstrap simulations provide no evidence of skilled fund managers in the right tail of the cross-sectional performance distribution, but several inferior performing fund managers in the left tail. Tests for persistence in performance provide no evidence of risk-adjusted performance persistence among previous winners, but short-term persistence among previous losers. Additionally, we perform a series of non-parametric two-period tests that allow us to infer whether some funds perform consistently better or worse compared to other funds in the sample. These tests reveal evidence of short-term performance persistence among both recent winners and losers. Moreover, we use two different methodologies to explicitly link fund performance to recessionary and non-recessionary states in the Norwegian business cycle. We find weak evidence of asymmetric performance of actively managed Norwegian mutual funds.