An Evaluation of the Best Ideas of Swedish Fund Managers

Abstract: We investigate the stock-picking ability of fund managers by comparing their portfolio weights to the corresponding market weight, creating portfolios based on the most overweighted stocks, called best ideas, and find that these in some cases outperform the market. The Swedish market exhibits properties which limit the usefulness of the best idea model, such as a heavy concentration in a few super-popular stocks that might be a reflection of liquidity management rather than the fund manager's view on future performance of the stocks. To adjust for this we exclude these stocks. The excess returns we then find co-vary with small, high-beta growth stocks that have recently not performed well. We find that less popular best ideas and less liquid best ideas tend to perform better, as well as best ideas from more concentrated funds. We do not find any clear evidence that smaller funds have better performing best ideas than larger funds. Best ideas that are fresh, where the last trade was a buy, performs better than non-fresh best ideas on average. The existence of positive alphas even after controlling for Fama-French factors suggests market inefficiencies exist in the Swedish fund market.