Do Norwegian bond funds create value?

Abstract

Performance evaluations of Norwegian bond mutual funds have until this date received limited attention. The introduction of updated credit-indices by Nordic Bond Pricing, has allowed for new opportunities to analyse funds of this major asset class. The main objective of this thesis is to evaluate whether Norwegian bond mutual funds are capable of creating value. In the study, we examine investment grade funds over two separate sampleperiods from 2010-2019 and 2015-2019. The thesis employ three separate approaches for evaluating whether funds are able to create value, namely active return, value added and factor models. Our findings indicate that the average Norwegian bond fund is capable of creating value compared to proper benchmarks. However, none of the generated value benefits investors. Further, we find that the apparent value creation relates to exposure toward common risk factors and not from fund managers possessing skill. When employing factor models, not a single fund exhibit a positive significant performance neither gross nor net of expenses. The sign and significance are robust across all factor models applied. The results of this thesis are important as funds for a long period of time have been compared to inappropriate indices, misleading investors. As an extension of the performance analysis, we consider whether it is possible to identify funds by examining their characteristics. Fund age, assets under management (AUM) and expense ratio are evaluated. Our findings suggest that funds with a high AUM are able to outperform others both gross and net of expenses. In addition, we find evidence that funds with high expense ratios generate higher returns gross of expenses. Keywords – Bonds, Bond funds, Nordic Bond Pricing, Active management, Factor exposure, CAPM