Decoding the Winning Strategy - An in-depth study of Swedish closed-end funds
(2023) NEKN02 20231Department of Economics
- Abstract
- The predictability of stock returns, prediction of buyout targets and value creation by activist owners are well-researched areas. However, Swedish closed-end funds' outstanding performance has received little attention. By implementing the existing research, we explore the key characteristics of closed-end fund targets and determine if investing in these characteristics can outperform the market. We investigate 215 transactions over the last decade and examine key performance indicators at purchase to find what distinguishes closed-end fund targets. Compared to the Swedish equity market, we discovered that closed-end funds invest in companies with lower valuations but higher profitability, efficiency, growth, number of analyst... (More)
- The predictability of stock returns, prediction of buyout targets and value creation by activist owners are well-researched areas. However, Swedish closed-end funds' outstanding performance has received little attention. By implementing the existing research, we explore the key characteristics of closed-end fund targets and determine if investing in these characteristics can outperform the market. We investigate 215 transactions over the last decade and examine key performance indicators at purchase to find what distinguishes closed-end fund targets. Compared to the Swedish equity market, we discovered that closed-end funds invest in companies with lower valuations but higher profitability, efficiency, growth, number of analyst recommendations, and interest coverage ratios. At the same time, we cannot find differences in leverage.
Furthermore, we trained a logit model on these characteristics to make predictions and form synthetic closed-end fund portfolios. We invested equally in the 15 most probable equities picked by the model to implement a buy-and-hold strategy over various periods. The strategy significantly outperformed the Swedish equity market in 67% of the time periods. We also did an out-of-sample test and cannot conclude the same results for the US market with consistent underperformance. To summarise, we present evidence that closed-end funds distinguish themselves from the rest of the market by investing in companies with specific financial characteristics. The results further imply that the CEFs target well-managed companies with good operating performance instead of low-performing companies with much room for improvement. We have also proved that it is possible to build a synthetic CEF portfolio from these characteristics and outperform the market. This is given that the model is trained on factors implemented by the leader in the particular market where the model picks companies. Conclusively we have also managed to create a strategy which has practical usability for a retail investor since all information origins from public market data. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/9118518
- author
- Stenberg, Fredrik LU and Albert, Markus LU
- supervisor
- organization
- course
- NEKN02 20231
- year
- 2023
- type
- H1 - Master's Degree (One Year)
- subject
- keywords
- Closed-end funds, predictability of stock returns, predicting investor targets, active ownership
- language
- English
- id
- 9118518
- date added to LUP
- 2023-11-24 08:57:50
- date last changed
- 2023-11-24 08:57:50
@misc{9118518,
abstract = {{The predictability of stock returns, prediction of buyout targets and value creation by activist owners are well-researched areas. However, Swedish closed-end funds' outstanding performance has received little attention. By implementing the existing research, we explore the key characteristics of closed-end fund targets and determine if investing in these characteristics can outperform the market. We investigate 215 transactions over the last decade and examine key performance indicators at purchase to find what distinguishes closed-end fund targets. Compared to the Swedish equity market, we discovered that closed-end funds invest in companies with lower valuations but higher profitability, efficiency, growth, number of analyst recommendations, and interest coverage ratios. At the same time, we cannot find differences in leverage.
Furthermore, we trained a logit model on these characteristics to make predictions and form synthetic closed-end fund portfolios. We invested equally in the 15 most probable equities picked by the model to implement a buy-and-hold strategy over various periods. The strategy significantly outperformed the Swedish equity market in 67% of the time periods. We also did an out-of-sample test and cannot conclude the same results for the US market with consistent underperformance. To summarise, we present evidence that closed-end funds distinguish themselves from the rest of the market by investing in companies with specific financial characteristics. The results further imply that the CEFs target well-managed companies with good operating performance instead of low-performing companies with much room for improvement. We have also proved that it is possible to build a synthetic CEF portfolio from these characteristics and outperform the market. This is given that the model is trained on factors implemented by the leader in the particular market where the model picks companies. Conclusively we have also managed to create a strategy which has practical usability for a retail investor since all information origins from public market data.}},
author = {{Stenberg, Fredrik and Albert, Markus}},
language = {{eng}},
note = {{Student Paper}},
title = {{Decoding the Winning Strategy - An in-depth study of Swedish closed-end funds}},
year = {{2023}},
}