The performance of Norwegian investment grade bond funds

Abstract

The following thesis examines the performance of Norwegian investment grade bond mutual funds in the period from January 2011 to January 2016. In this study we addresstwo important issues. Firstly, by applying a CAPM model framework, we examine whether funds are able to outperform passive portfolios. Due to the lack of appropriate benchmarks for evaluation in the Norwegian market, we construct and include a bond index in our analysis. Across several different model specifications, we cannot detect a single fund exhibiting significantly positive performance relative to passive portfolios. Secondly, we extend the CAPM framework and analyze whether Norwegian bond funds generate abnormal returns1 when controlling for the term and credit risk premium introduced by Fama and French (1993). We account for the risk factors by applying return-based style analysis. When controlling for the risk factors, we do not detect any significantly positive performance among the bond funds in our sample. Our results are important for investors, as attempts to select attractive securities or timing the market typically contributes to higher management fees compared to bets on risk factors. Thus, investors seem better off without funds seeking to harvest returns from market timing and security selection.