Mutual Fund Performance in Norway and its Effect on Investor Capital Allocation

Abstract

Using a survivorship bias–free dataset, we investigate the performance of Norwegian mutual funds in the period 2000–2015, and its effect on investor capital allocation to mutual funds. We evaluate the performance of the aggregate mutual fund industry using a range of different performance metrics. To distinguish skill from luck, we evaluate the statistical significance of individual fund performance, by comparing the distributions of actual and simulated three–factor alphas and t–stats. Simulated distributions are generated using a bootstrap procedure. Lastly, we investigate the effect of past performance on investor capital allocation, using correlation and regression analysis of capital flows on different performance metrics. We do not find evidence that the mutual funds in aggregate outperform the market in risk–adjusted net returns. If the average fund is able to generate abnormal gross returns, the gains accrue to the fund manager in the form of management fees, and is not reflected in net returns. Bootstrap evidence shows strong signs of lack of skill among poor performers, but only weak signs of positive skill among high performers. We find that investor capital allocation is affected by past performance, but we do not find conclusive evidence favoring one measure of performance over another. In spite of weak evidence for skill among high performers, we find that the association between past performance and fund flows is stronger for high than for poor performers. This result implies that investors more readily invest in past winners than they divest from losers.