Do Norwegian Portfolio Managers Have the Ability to Generate Value Through Stock Selection?

Abstract

In this thesis, we examine the value creation capabilities of Norwegian portfolio managers from 2010 to 2023, through stock selection. Using key concepts such as active share and best ideas, we investigate the potential of active fund managers to generate returns that exceed the benchmark. The thesis uses active share as a measure of divergence in portfolio holdings from a benchmark, while the best-idea approach evaluates the performance of managers' highest-conviction positions.

We are using data from 58 actively managed and eight passively managed funds in the Norwegian market. The active funds are divided into active share quartiles and we construct portfolios of the best and worst ideas as well as portfolios of best-worst ideas. This is done to analyze their performance against the benchmark, both for active share quartiles and best ideas. The study employs statistical methods, including t-tests and regression models such as CAPM, Fama-French, and Carhart, to measure fund performance along with several other performance measures.

The findings indicate that there is no clear link between higher active share and superior returns. For best ideas, on the other hand, constructed portfolios significantly outperform the benchmark, with more concentrated portfolios delivering the highest returns, although with increased risk. Furthermore, the regression results reveal significant alpha generation for the best-idea portfolios. In contrast, worst ideas do not significantly underperform the benchmark, and thus do not contribute much with positive alpha for managers. Therefore, our results show clear indications that Norwegian fund managers perform much better in identifying well-performing stocks than poor-performing stocks.

The thesis contributes to the ongoing debate on active versus passive management, especially highlighting the roles of portfolio concentration and high-conviction positions in fund performance.