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THE ACTIVITY AND PERFORMANCE OF FINNISH EQUITY FUNDS Applying the Active Share method

Purpose of the study This thesis concentrates on Finnish equity funds investing in Finland, Nordic Countries and Europe. The objective is to determine the level of active management in the Finnish equity market and the performance and expenses related to different activity levels. The objective is also to examine closet indexing in the Finnish equity market.

Data and methodology The data in this thesis is from the first quarter of 2008 to the third quarter of 2010. Mutual fund holdings are from Investment Research Finland Ltd. and funds’ annual and quarterly reports. Benchmark index holdings are from MSCI Barra and NASDAQ OMX. All the net asset values for the funds and benchmark indices are from Investment Research Finland Ltd. Total Expense Ratios are from the Finnish Mutual Fund Reports.

The level of active management is determined by using Active Share and tracking error. Active Share measures the amount of fund holdings that differ from the benchmark index holdings and tracking error calculates how much the fund’s daily returns deviate from the benchmark index returns.

Results The Finnish equity funds are quite active since less than 40% of the fund assets are on average invested according to benchmark indices. The equity funds investing in Finland are clearly the most passive compared to the funds investing in Nordic Countries and Europe.

The average performance of the Finnish equity funds increases as the level of activity increases. In addition, the most active funds performed the best within every fund group with different investment scopes.

There exist several closet indexing funds in the Finnish equity fund market. These funds also charge substantial fees compared to their activity levels.

The average Total Expense Ratio increases with the level of active management i.e. more active funds charge higher fees.