Style based analysis – A study on Swedish equity funds

University essay from Lunds universitet/Företagsekonomiska institutionen

Abstract: Purpose of the study Selecting funds is a difficult task. Although relevant since everyone working in Sweden has to invest in funds within the Swedish pension system. In order to support the selection Style based analysis can be used. This is a tool developed by William F. Sharpe for analyzing equity funds’ historical asset allocations, with only returns as input. Our purpose is to test to which extent a Style based analysis is useful for the Swedish equity fund market. Methodology In order to fulfill our purpose, we used a quantitative approach, based on formerly developed theories, mainly the Style based analysis. We chose to analyze Swedish oriented equity funds within the pension system that have been active since at least 1995. After having applied these restrictions we ended up with 15 funds. Further, we chose relevant indices to represent the asset classes in which the funds invest. For the Style based analysis we used the Maximum Likelihood method, a convenient method when performing multiple linear regressions with restrictions. Results We tested our models relevance from several perspectives, and found it to be useful for the Swedish Equity fund market. It could both analyze the funds historical asset allocations, and forecast coming returns Ex Post reasonably well. Furthermore, we discovered two areas where the model can be of special interest. When choosing funds within a specific segment, for instance Swedish oriented equity funds, the Style based analysis can be used to analyze the differences between the funds within the segment. We also noticed that the Style based analysis can be a useful tool when studying whether or not a fund is an index follower.

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