Decision-making In Mutual Funds During the COVID-19 Pandemic

AND THE MAIN FIELD OF STUDY INDUSTRIAL MANAGEMENT, SECOND CYCLE, 30 CREDITS STOCKHOLM, SWEDEN 2021

Decision­making in mutual funds during the COVID­19

pandemic

KTH Master Thesis Report

Amar Galijasevic and Josef Tegbaru

Decision-making In Mutual Funds During the COVID-19 Pandemic

by

Amar Galijasevic Josef Tegbaru

Master of Science Thesis TRITA-ITM-EX 2021:334 KTH Industrial Engineering and Management

Industrial Management SE-100 44 STOCKHOLM

Beslutsfattande i svenska aktiefonder under pandemin COVID-19

av

Amar Galijasevic Josef Tegbaru

Examensarbete TRITA-ITM-EX 2021:334 KTH Industriell teknik och management

Industriell ekonomi och organisation SE-100 44 STOCKHOLM

Decision­making in mutual funds during the COVID­19 pandemic

Amar Galijasevic Josef Tegbaru

Approved Examiner Supervisor

2021­05­27 Tomas Sörensson Yury Kucheev

Abstract

During the beginning of 2020, the world was struck by the vicious virus COVID­19, forcing societies into lockdown. Demand froze across the board and this was quickly reflected on stock markets worldwide. The Swedish stock market index, OMXS30, plummeted around 30% in a matter of weeks. As an investor, it can be difficult to navigate the financial market and make investment decisions during such turbulent periods.

The goal of this study is to analyze the decision­making made by Swedish mutual fund managers during the turbulent market period of 2020, to identify common behavior. This is done through interviewing fund managers of major Swedish mutual funds.

The results of the study imply that a specific template for decision­making amongst fund managers is difficult to create. Yet, a common and early decision during market corrections is to reduce positions in assets performing well in order to maintain fund liquidity and capture new investment opportunities created by the correction. Making decisions during market volatility is a difficult process that is dependant on factors such as investment mandates, internal resources, investment­horizon and preferred valuation methods.

Keywords

Fund managers, Mutual fund, Investment, Decision making, COVID­19, Stock market crash, Market correction

under pandemin COVID­19

Amar Galijasevic Josef Tegbaru

Godkänt Examinator Handledare

2021­05­27 Tomas Sörensson Yury Kucheev

Sammanfattning

Under början av 2020 spreds viruset COVID­19 över stora delar av världen, vilket tvingade samhällen att stänga ner och införa restriktioner för att minska smittospridningen. Efterfrågan föll på bred front och detta återspeglades snabbt på aktiemarknaderna världen över. Det svenska aktieindexet OMXS30 rasade runt 30% på ett par veckor. Under sådanna turbulenta perioder på börsen kan det vara svårt som investerare att navigera och göra rätt beslut kring investeringar.

Målet med denna studie är att analysera beslutsprocessen vid investeringar hos svenska fondförvaltare under den volatila marknadsperioden 2020, för att försöka identifiera likheter. En rad intervjuer har utförts för att samla in information om förvaltarnas beslutsprocesser.

Resultaten från studien visar att det är svårt att hitta en gemensam metod som fondförvaltare använder vid beslutsfattande i turbulenta marknadsperioder. Trots det, är det vanligaste och tidigaste beslutet att minska positioner i tillgångar som klarat sig väl tidigt i nedgången för att upprätthålla fondens likviditet och kunna investera i nya möjligheter skapade av börsnedgången. Att fatta beslut i fonder under marknadsvolatilitet är en svår process som är beroende av faktorer som investeringsmandat, interna resurser, placeringshorisont och värderingsmetod.

Nyckelord

Fondförvaltare, Aktiefond, Investeringar, Beslutsfattande, COVID­19, Börskrasch, Marknadskorrektion

First and foremost, we would like to thank the fund managers who participated in the interviews. All of you were incredibly helpful and considerate prior to, during and after the interviews. Without you, this project would not have been possible to complete so we send out our utmost gratitude.

We would also like to express our appreciation for our supervisor Yury Kucheev and our examiner Tomas Sörensson for actively helping us throughout the writing of this thesis. Their help has been incredibly valuable for us.

Furthermore, the seminar sessions have meant receiving good feedback from all participants and especially from the ones who have provided opposition during the course of the writing. Thank you to all of the participants in our seminar group.

1 Introduction

1.1 Background. . . 1

1.2 Problem Formulation. . . 5

1.3 Purpose . . . 6

1.4 Limitations . . . 6

1.5 Expected contribution . . . 7

1.6 Outline . . . 7

2 Literature and Theory Review

2.1.1 Equity fund management . . . 10

2.2 Decision­making process . . . 12

2.2.1 Top­down . . . 13

2.2.2 Bottom­up . . . 14

2.3 Investment mandate . . . 15

2.4 Investment philosophies . . . 16

2.5 Behavioral finance . . . 17

2.5.1 Herding behavior. . . 18

2.5.2 Overconfidence . . . 18

2.6 Investor behavior and patterns . . . 18

2.7 Fund manager decision­making behavior . . . 19

2.7.1 Decision­making behavior by active equity fund managers in Sweden . . . 21

2.8 COVID­19 and the stock market . . . 22

2.9 Retail trading during COVID­19. . . 22

2.10 Conceptual framework. . . 23

3 Methodology

3.1 Methodological approach . . . 26

3.2 Research design . . . 27

3.3 Theory and Literature Review. . . 28

3.4 Qualitative Research Procedure . . . 28

3.4.1 Case study . . . 28

3.4.2 Interviews and data collection . . . 31

3.4.3 Interview Coding Method . . . 32

3.4.4 Transparency criteria in qualitative research . . . 33

3.5 Interviewees . . . 34

3.6 Interview design . . . 35

4 Results and analysis

4.1.1 Macro economical aspects . . . 40

4.1.2 Global trends . . . 41

4.2 Sell­side research . . . 42

4.3 Evaluating investments . . . 45

4.3.1 Assess current holdings. . . 46

4.3.2 New investment opportunities . . . 50

4.4 Other aspects of institutional investing . . . 52

4.4.1 Out/inflows of capital . . . 53

4.4.2 Investment mandates . . . 55

4.5 Investment Philosophy . . . 56

4.5.1 Investment philosophy and classical market theories . . . 57

4.5.2 Investment philosophy over time . . . 60

5 Discussion

5.1.1 Macro economical aspects and global trends . . . 62

5.1.2 Sell­side research . . . 64

5.1.3 Evaluating investments . . . 65

5.1.4 Other aspects of institutional investing. . . 67

5.1.5 Investment Philosophy . . . 68

5.2 Discussion of methods . . . 70

5.3 Research Quality. . . 71

5.4 Ethics . . . 72

6 Conclusion

6.2 Impacts and sustainability . . . 76

6.3 Reliability and transparency . . . 76

6.4 Further research . . . 79

Bibliography

Introduction

This section covers the background to the subject of this thesis, with the intention to provide a clear picture of what aroused interest for the subject. Further, the section covers the purpose of the study, how potential contributions may affect the field of study and fill gaps in existing research. Lastly, the research questions are formulated and limitations for the study are set.

1.1 Background

The stock market is generally seen as a good place for companies looking to raise capital and gain liquidity, as well as for investors searching for return on invested capital (Gough, 2012). This positive outlook does not always reflect the actual outcomes, as companies may go bankrupt or may lose money which in turn make investors lose money. Sometimes it is due to specific companies being operated poorly, but other times it is due to systemic crashes that makes all share prices plummet. This is not something one can easily, if even possibly, hedge investments from (Bhansali, 2014).

Economic bubbles and economic crashes, or market corrections, have been happening for centuries. Perhaps one of the most famous early bubbles is the Tulipmania (MacKay, 2011) which occurred during the seventeenth century in the Netherlands.

Tulips, imported from Turkey, were seen as rare, exotic and beautiful which made them attractive and the tulip trade flourished. People were buying tulip bulbs, anticipating even higher prices the year to come and so the futures market of tulips soared in the Netherlands. Some people even took loans and wrote contracts on future tulips.

Eventually, the market acknowledged that the prices could not continue like this

forever and fear spread. Prices fell and a large market correction occurred, resulting in substantial losses for many tulip investors.

Although societies and economies have changed a lot since the Tulipamnia, the world has faced several stock market corrections since. Throughout modern times there have been several severely turbulent periods on the stock market, such as the times of Black Monday in 1987, the burst of the Dot­com bubble during the beginning of the 2000 and the aftermath of the housing bubble (or Lehman crash) in 2008, just to mention a few. All these periods resulted in substantial losses for many investors, both retail and institutional investors. It is safe to say that it is very difficult to foresee such large market corrections, even if certain people are often calling out potential bursts of bubbles and market corrections, such as Nouriel Roubini(Cox, 2020).

The Dot­com bubble (Goodnight and Green Jr, 2010) is similar to the Tulipmania in the way it was formed and the investors behavior. It was built up during the late 1990s as political decisions redirected a lot of funds into creating an ”Information Superhighway” which would link ”computers in Government, universities, industry and libraries”. Over time this created an overambitious view on the future, and both Government and private funds where flooded to the new sector. The market had strongly positive outlooks on a lot of the Initial Public Offerings (IPOs), with Netscape being one of the first in 1995. New Dot­com companies rushed to the market and stock prices soared. Behavioral finance phenomena such as herding behaviour and fear of missing out on the price rush, led to even more investors investing in the new sector.

When investors and analysts realized that many of the companies could not perform as anticipated the prices declined rapidly and it was difficult for investors to exit at moderate prices. This led to a hefty market correction and very volatile period on the stock market, not very unlike the period during the first half of 2020. From the peak in 2000 to the bottom of 2002, the Nasdaq Composite stock index fell 78% (NASDAQ, 2021) which can be seen in Figure 1.1.1.

Figure 1.1.1: Nasdaq Composite Index 99­04. Source: Yahoo Finance

During 2020 the stock market took a hard downturn, but this time was different from earlier market crashes. The world was struck by a new and vicious virus, known as COVID­19 and the immense spreading of the virus affected many parts of the global economy negatively, as several countries across the globe were forced into national lockdown. The pandemic was above all a public health emergency ­ as long as human interaction remains dangerous, businesses can not responsibly return to the normal state. The severe impact of the virus was quickly seen in the international tourism industry as it went down by 22% in Q1 2020 and by 65% in the first half of 2020 compared with the same time periods in 2019 (Aref, 2020). Further, the global consumer services industry collapsed, caused by the widespread global lock­downs alongside the growing uncertainty as to the longevity of the outbreak. Consumer services includes amongst other hotels, restaurants, bars and recreational pursuits, which were forced to lay off employees and many even into bankruptcy (Jones, 2020). The major economic disruption brought on by COVID­19 had a direct impact on the GDP growth, inflation and the overall outlook for the coming quarters. A report (Organisation for Economic Co­operation and Development, 2020) published by OECD on the 2nd of March 2020 pointed out that growth prospects remained highly uncertain, including a projected drop in global GDP to 1,5% (2.9% in 2019),

large disruptions to industry supply chains and weaker final demand for imported goods and services. In addition, the report stated that a longer lasting and more intensive coronavirus outbreak would even weaken prospects considerably. Stock markets reflected this economic alarm in February 2020, all through to April 2020.

The adverse impact on the confidence about the global economy was a significant reason for the stock market correction, known as the Coronavirus Crash. In Figure 1.1.2 the market correction of 2020 is visualized for three large indices.

Figure 1.1.2: Global indices development during COVID­19. Source: Yahoo Finance

The Coronavirus Crash was mostly caused by negative outlook on the economy due to the virus and the high uncertainty of the virus’ impact on society, but the volatility was enhanced due to an increasing fear of global recession. Global unemployment was at its lowest, 5.0%, since the latest financial crisis in 2009. The fact is that the world had a decade of economic prosperity and sustained global growth after recovery from the Great Financial Crisis. This, together with the growing Global corporate debt that rose from 84% of GDP in 2009 to 92% in 2019 increased the severity of the Coronavirus Crash (The Economist, 2020).

During volatile times and periods of general panic in the market, it can be good to take a step back and observe how investors with stable historical returns are behaving

and not get carried away by phenomena explained by behavioral finance. There are several types of investors on the stock market, including retail investors and various types of institutional investors. This study will focus on institutional investors, more precisely mutual funds. Institutional investors vary a lot in the amount of asset under management, market experience and what their mandates allow them to do. Nonetheless, institutional investors most often have long experience of financial markets and their full­time jobs evolve around stock picking, meaning they spend their whole days observing the financial markets.

This study will focus on the decision­making process of fund managers and their behavior, in temrs of what they do, during the market correction of 2020. By analyzing the decision­making of experienced fund managers, this study will gain new insight on how to navigate through volatile markets periods in an optimal way and learn from the, so called, smart money.

1.2 Problem Formulation

The market correction of 2020, or else known as 2020 stock market crash, is now in retrospect seen as one of the most severe stock market crashes in modern history (Reisner, 2020). Being able to handle investments and navigate through what decisions to make or not to make when the financial market is volatile, is of large importance for any type of investor. The future will undoubtedly include market corrections that are very difficult to foresee, yet important to handle as good as possible in order to maintain a good return over the longer term. With several periods of high market volatility in the last decade (2010, 2015, 2016, 2018 and 2020), the importance of making better decisions during such periods may be more important than ever (Robinson, 2020).

Reasonably it may be valuable to take a step back and learn from the people who are navigating the financial markets as a profession and what their reasoning is behind their decision­making when market corrections occur. To investigate this, two research questions have been formulated:

• What are the most important aspects to consider during market corrections, according to fund managers?

• Which decisions did fund managers focus on during the market correction of

2020 and why?

1.3 Purpose

Firstly, the purpose of this study is to analyze decision­making amongst fund managers during the market correction of 2020. The analysis can potentially yield valuable knowledge on how and what the more experienced investors do during market corrections. Secondly, the investment philosophy of the fund managers will be discussed to act as a lense, or filter, to assess the soundness of the answers given by the fund managers and perhaps separate which decision can be of true importance to generate alpha in the market. The study may be of great interest for all types of investors wanting to learn which decisions were the most important for fund managers during market corrections. Retail­ and institutional investors understanding the decision­making process of the fund managers during volatile periods may help increase the trust for mutual funds as well. This knowledge may be highly important in future market corrections and periods of high uncertainty.

1.4 Limitations

The study is limited to the Swedish market, meaning that the research area will be based on investigating the decision­making amongst Swedish mutual fund managers.

However, non­Swedish fund holdings may exist as no limitation has been made regarding the fund managers’ geographical investment mandate. The decision to delimit to mutual fund managers among all types of institutional investors was made.

An increased focus was also made on mutual fund managers investing in equity since the investment process and market dynamics between different mutual funds are quite dissimilar (SEC, 2021a). Mixing different types of mutual funds would require several interviews for each type in order for the study to carry reliability. The study is limited to Sweden due to the increased complexity of performing a multi­country analysis and difficulty of arranging interviews with fund managers outside of Sweden.

1.5 Expected contribution

Currently there are few studies on fund managers decision­making during market corrections, even less during the market correction of 2020. This study will hopefully fill the existing gap regarding fund managers decision making during the market correction of 2020, but also provide all investors with information on what aspects that are important for decision­making during highly volatile periods. Further, the goal is to tie together some of the decision­making processes with aspects from the behavioral finance field since a lot of investors can be affected by biases, especially during periods of high uncertainty.

The study will cover many aspects of investing, looking at institutions, in this case fund managers, as that is where the most experience often lies. Based on that the goal is to try to uncover how fund managers act and what they believe is important during market corrections. This study will not only fill gaps within the research field, hopefully it can be of great practical use for many investors.

1.6 Outline

The research is divided into 6 sections. The sections following are highlighted below with a short description of what each section includes.

• Section 2 ­ Literature and theory review comprises all necessary and relevant information and theories needed to understand the research topic, as well as answering the research question. The Section will, amongst other, contain various information regarding institutional investors, investing approaches, previous studies on allocation and behavior during market crashes, and a segment about behavioral finance.

• Section 3 ­ Methodology covers the methodological approach used in the study to answer the research question. In this Section there is more information about how the literature review and interviews are conducted.

• Section 4 ­ Results and analysis comprises all information from the interviews and summarizes the findings in different areas highlighted during the interviews. The answers from the interviews have been coded and similar topics

have been grouped together, making it easier to analyze and make a framework based on the results.

• Section 5 ­ Discussion will cover a broad discussion of the results from the interviews to compare it with previous research and tie on to existing theory were possible. Further, the method is discussed and the generalizability of the study as well.

• Section 6 ­ Conclusion is the last part of the study and will tie the whole research paper together. In this Section, the conclusion of the study will be presented a long with the answers to the research questions. All implications from the study will be presented and potential areas for further research as well.

Literature and Theory Review

This chapter presents the reader with theoretical aspects which are of need for reader with limited knowledge of the subject, covering, amongst other, several aspects of investing, financial behavior and investment philosophies. Further, this Section will cover previous literature on the subject of institutional and retail investing during the coronavirus crash, as well as investing during previous market corrections and investor behaviors. The literature review will serve as a base for this study.

2.1 Mutual Funds

A mutual fund is a certain type of fund consisting of a portfolio of securities such as stocks, bonds, or other assets. A mutual fund is seen as structured since it must match the investment objectives stated in its prospectus. The prospectus will clearly state if the mutual fund is only allowed to invest in certain types of securities, which will define the asset class for the mutual fund. Most mutual funds fall into one of the three categories: fixed income funds, equity funds or balanced funds. Fixed income funds consists of bonds, equity funds consists of stocks while balanced funds consists of both (Royal Bank, 2021). A mutual fund is operated by a fund manager who allocate the funds assets in order to produce capital gains for the funds investors (SEC, 2021b).

The investors often constitute of both institutional­ and retail investors, but some mutual funds are sometimes strictly open for institutional clients to invest in. The asset management firm then subtracts the annual fund fee from the generated return before paying out to investors, which is done on a continuous basis.

2.1.1 Equity fund management

Reilly and Brown (2012) describe that an equity fund can either be actively managed or passive managed, however, the latter is irrelevant due to the aim of this study being decision­making behavior among fund managers. They further describe that an active equity fund is managed by one or several asset managers who analyze the economy, industries, and companies; evaluate firms’ strategies and competitive advantages; and together with CIO then pick individual stocks for purchase or for sale.

Unless other source is stated, the following descriptions on value­ and growth investing are based on Investment Analysis and Portfolio Management by Reilly and Brown (2012). An important development in active equity management has been the creation of portfolio strategies based on value­ and growth­oriented investment styles.

The asset management firms of today commonly define themselves as ”value stock managers” or ”growth stock managers” when marketing their services to customers.

See figure 2.1.1 for a visual description of their characteristics.

Figure 2.1.1: Characteristics of Value and Growth Stocks. Source: (Reilly and Brown, 2012)

Value Investing

Value investing is the skill of buying stocks which trade at a significant discount to their fundamental or book value. They further explain that this type of investing can be achieved by searching for companies that are cheap on valuation metrics, typically

low multiples of their profits or assets, for reasons which are not justified over the longer term. An important factor for successful value investing, that is typical for value stock managers, is the approach of having a contrarian mindset and a long term investment horizon. The main idea of a value stock manager is that they believe that the market overreacts to good and bad news, resulting in stock price movements that do not correspond to a company’s long­term intrinsic value.

Although there are several reasons why a stock might trade at a lower price than its fundamental value, profit disappointment tends to be the most common reason and this usually results in a substantial price fall. Primarily, value stock managers recognize that most businesses are long term in nature and the real effect of short term profit drops on the long term value of a business is often small. Furthermore the managers recognizes that, in most cases, disastrous profit falls are usually reversed over the longer term—as well as for the other way around, excessively strong profit growth tends to slow.

The fundamental value of a share is calculated by its future cash flows discounted to today, divided by the total shares of the company. Clearly, when a value stock manager calculates future cash flows, several assumptions are made about both the future operations of the company as well as the entire future of the market. In other words, it is extremely difficult to estimate the intrinsic value of a share, as the assumptions made to calculate a theoretical present value are in fact only uncertain estimates of the future. Two value investors can get exactly the same information about a company, but arrive at widely different valuations and thus the inherent value of a share.

Unfavorable market sentiment can also mean that it can take several years before the calculated intrinsic value that is believed to exist materializes in price movements. This means that it can be psychologically difficult to maintain shares that do not develop well for long periods. The topic about market trading psychology is described in the Section named Behavioral Finance.

In sum, the essential underlying principles of value investing are:

• Understanding securities as stakes in actual businesses

• The use of fundamentals to calculate intrinsic value

• The emotional discipline to act when there is a wide divergence between the price at which something is offered in the market and the actual fundamental worth the investor has determined

Growth Investing

Growth investing is an investment strategy where the idea is to increase the investor’s capital by investing in growth stocks. Growth stocks are defined as, often, young or small companies that are expected to increase their earnings at an above­average rate compared to their industry or the general market.

Growth companies usually have large expected profits and are usually highly valued.

This is rarely a problem as growth persists. For a highly valued growth company, the investor usually has to pay a high share price due to the profits the company is expected to generate in the future. Investors buy growth stocks for the return on the price­increase rather than dividends.

The main characteristics of growth funds may be summarized by the factors (Merrill Edge, 2021) :

1. High earnings growth record. As the investors expect the continued fast growth, they are willing to pay higher multiples today in order to take part of the expected return from future price increases.

2. Priced higher than the broader market. Unlike companies that gets depressed from slower economic periods, growth companies tends to achieve high earnings growth despite of macroeconomic conditions.

3. More volatile than the broader market. The risk associated with growth companies is that its high price could fall sharply on any negative news about the company.

2.2 Decision­making process

This Section is based on the written articles on top­down and bottom­up investing by Justin Kuepper (2020). The decision­making process of finding good investments requires the investor to go through certain important factors. One approach is to start

by looking at the bigger picture of a whole market or economy, to then narrow it down to the selection of the investment. This is called a top­down process, visualized by the created figure 2.2.1. The other approach is to start by thoroughly analyzing a specific company, to later widen the scope by peer analysis and sector growth prospects. This is called a bottom­up process, visualized by the created figure 2.2.2.

2.2.1 Top­down

Big picture factors

Top­down investing is an approach where the investor starts by identifying areas of the market expecting to perform well, based on macroeconomic factors. These are factors such as GDP, employment, taxation, inflation, interest rates and other aspects of the larger economy .

Sector Specific Factors

After looking at the big­picture conditions, investors next examine the general market conditions to identify high­performing sectors, industries, or regions within the micro­

economy. The purpose is to find certain industrial sectors that are forecast to outperform the market.

Security Selection

Once a certain sector has been chosen based on above criteria, the investor will look at the fundamentals of various companies and scrutinise them before selecting investment. Whether these company specific factors are attractive or not is also somewhat dependant on the investment horizon of the investor. It is important to understand that this process is heavily reliant on the investor’s outlook on ”the big picture”. If a global economic recession is imminent, a pursuit of a defensive investment strategy is likely to guide the rest of the search process .

Figure 2.2.1: Top­Down Approach.

2.2.2 Bottom­up

Entity / Company specific factors

The bottom­up decision­making process is used by investors more interested in the analysis of a given company’s performance, regardless of trends in the overall market.

Consequently, the initial stage of the process is picking a company and giving it a thorough analysis. This analysis often includes valuation of a company and studying other ”soft” factors such as management and long­term strategic goals.

Peer Analysis

This approach proceeds by widening its analytical perspective which mainly includes analyzing the industry. Less focus is put on market conditions, macroeconomic indicators, and industry fundamental. Comparable analyses is in focus during this step, which is done by looking at financial ratios and analyzing the competitive positioning of the company .

Sector outlook

It is important to understand that this process enables the investor to examine the fundamentals of a stock regardless of market trends. However, a vital last step is assessing the sector outlook of the company in question. Analyzing how the market and the particular industries will develop is a crucial part of the bottom­up approach.

Figure 2.2.2: Bottom­Up Approach.

2.3 Investment mandate

An investment mandate consists of guidelines for what strategy and risk the fund should maintain, according to Kennon (2020). Furthermore, the mandate varies depending on the goals of the fund owners. The investment mandate of a fund may include instructions such as priorities and goals, benchmarks, acceptable levels of risk, types of investments to prioritize or avoid, and any other guideline for how the assets should be managed. Lastly, Kennon states that an investment mandate can restrict a fund manager to specific asset classes, geographic areas, industries, sectors, valuation levels, market capitalization and more .

2.4 Investment philosophies

In a study by Minahan (2006) the area of Investment Philosophy was investigated and evaluated. Evaluating investment philosophies in this sense might not be the first thing that comes to ones mind when looking at investment decisions. But, being a successful investor means picking investments that will yield good returns over time, often done by discounting future cash flows and comparing to current stock price to find valuable investments. Of course, there are several aspects making this procedure more difficult than it sounds. No one knows the future cash flows with certainty nor the correct discount for a risky asset. When searching for good investment opportunities, one question that arises is: why has the market not discounted the information on which future cash flows and discount rates are based upon? To answer the question, investors need to have points of view on how market prices and mispricing of securities, and what the investors competitive advantage is in identifying such mispricings.

These points of view structure investment processes and guiding for execution of said investment.

With the background above, an investment philosophy, according to Minahan (2006), can be defined by three key points:

• A set of beliefs regarding the security pricing mechanism and what about the mechanism causes mispricing

• A set of beliefs regarding the manager’s competitive advantage in exploiting these mispricings

• A thesis about how these beliefs can be exploited to generate alpha (a so called alpha­thesis)

Minahan (2006) further boils this down to three key definitions for ”sound” investment philosophies:

• Knows where it stands with respect to capital market theory and evidence

• It wrestles with confirmation and disconfirmation as it is used in practice, and adapts as necessary

• Has deep enough core principles that adaption does not result in total change

The investment philosophy concept suggests that managers are more likely to generate alpha if they have a clear thesis of how they generate alpha, put significant effort into understanding where their performance comes from and have thought about whether their alpha­generation process will need to change over time. Many institutional investors and managers do not pass the ”Investment Philosophy test”, due to reasons such as not having an alpha­thesis, their alpha­thesis not being conceptually grounded, not thinking very deeply about where their performance comes from or not thinking about if their alpha is based on temporary characteristics of the market. The latter one is vital to check when the market is turbulent or a market correction is occurring.

When evaluating fund managers it is wise to investigate their investment philosophy, to be able to differentiate the alpha generators from the alpha pretenders. To differentiate those who have a clear and well though strategy for generating alpha from those which generate alpha from temporary market characteristics.

2.5 Behavioral finance

Behavioral finance is a different way of viewing and studying financial markets than the classical view of utility theory and arbitrage assumptions laid forward by Von Neumann­Morgenstern in 1947. Bazerman and Moore (2012) describe behavioral finance as ”An application of what we know about common judgement errors to the world of investment”. Behavioral finance is based on cognitive psychology and the limits to arbitrage. In many ways, people make systematic errors in the way they think as they are perhaps overconfident in their beliefs or put too much weight on recent experience. Rather than ignoring cognitive psychology, Behavioral finance uses this knowledge. Limits of arbitrage refers to predicting when arbitrage forces will be effective and when they will not.

In modern finance the Efficient Market Hypothesis (EMH) is often one of the building blocks, arguing that markets are rational. Not necessarily arguing that all investors on the market are rational (Ritter, 2003). The EMH argues that prices are driven to the ”correct” value by investors competing to gain abnormal profits. Further, it assumes that markets make unbiased forecasts of the future. Behavioral finance on the other hand, assumes that financial markets are informationally inefficient in some circumstances.

2.5.1 Herding behavior

Herding behavior (Economou, Philippas, and Caporale, 2008) refers to how individual decisions are influenced by group behaviour. It stems from the observation that if a herd of animals starts moving in one direction, all the animals want to follow the herd.

A classic, and yet relevant, experiment on herding behavior was conducted in the 1950s (Asch, 1956). People were divided into groups of 8­10 people, were only one was the real subject and the rest were confederates. The group members were asked questions, quite easy ones, regarding a visual perception task. The subject was placed next to the last person in the line and the confederates were told to give the wrong answer in 12 of 18 question rounds. The result was astonishing, 75% of the subjects yielded to the majority answer in at least one question round, even though it was obviously wrong. All in all, in 37% of the trials, the subjects yield to the majority. If one of the confederates deviated and answered correctly, the rate of conformity fell drastically.

2.5.2 Overconfidence

Overconfidence (Bazerman and Moore, 2012) can manifest itself in a number of ways, for example in too little diversification. People tend to invest too much in what they are familiar with, often local companies, even though this is bad from a diversification perspective. Men tend to be more overconfident than women, which manifests in their trading behavior. Men generally trade more than women which can be explained by their overconfidence.

According to a study by Wijayanti, Suganda and Thewelis (2019), overconfidence tends to differ when examining different age groups. Younger people tend to be more overconfident and wanting to take more risk when investing than older people do.

When a financial correction occurs on the market it can be expected that younger people will take more risk than older.

2.6 Investor behavior and patterns

A recent article on compensation forms of institutional investors states that the assumption of homogeneity within institutional investors must be questioned (Velte

and Obermann, 2020). The authors found that only special types of investors (e.g., with long­term and non­financial orientations and active institutions) run an intensive monitoring strategy from a sustainability viewpoint. Whether this intensive monitoring strategy (definition is stated in the publication) is de­prioritized during periods of market turbulence, such as the COVID­19 crisis or other historical market crashes, is an interesting subject to further examinate.

A study on the Qatari capital market researched the trading patterns and performance of individual and institutional investors (Ahmed, 2014). The study found that institutional investors pursue positive feedback trading strategies while retail investors tend to be negative feedback traders. It also showed that both types of investors engage in some herding, but the institutional investors tend to have better performance than retail investors over the whole period. This may be due to some information asymmetry between the categories and it implies that the trading activities of retail investors are generally driven by factors that are irrelevant to fundamentals.

2.7 Fund manager decision­making behavior

Several studies show that fund managers spend a significant amount of time filtering through information by relevance (Barker et al., 2012; Henningsson, 2009; Holland, 2006; Holland, 2016; Tuckett, 2012). A study by Tuckett and Taffler (2012), based on interviews with fund managers, found that asset managers are forced to make decisions based on information that is open to different interpretations. The available information is often large in quantity and many times conflicting. In addition, the computing power that managers have access to often gives insignificant advantage. The study shows that there is no obvious decision; which is why investment opportunities arise. In sum, the decisions that fund managers make are done in highly uncertain information environments. Decision­making is based on subtle interpretation of ambiguous information and by no means obvious.

Two studies found that fund managers seek to acquire information from several sources to reduce uncertainty (Coleman, 2015; Hellman, 2000). The study by Hellman (2000) was in fact a study of Swedish institutional investors and the study by Coleman (2015) included fund managers from different countries. Holland (2006) did forty case studies of UK fund managers and revealed that both public information, from both

public and private sources, were put together. The opinion was formed by iterative evaluation of existing information while additional was waited or searched for (cf.

Clarkson and Meltzer, 1960; Hellman, 1996). Instead of relying on investment theory such as discounted cash flow analysis, CAPM or the modern portfolio theory ­ fund managers relied on intuition and qualitative information (Coleman, 2014; Coleman, 2015; Holland, 2006; Holland, 2016).

Fund managers in Sweden were found to use analysts, brokers and other investors from their social network to better understand company information (Henningsson, 2009). The study by Hellman (2000) showed different preferences in information sources amongst Swedish institutional investors, some preferred sell­side research while others relied on internal analysis. The same study concluded that fund size mattered for what the preference of the institutional investor would be. Portfolios with larger size legitimized employing and utilizing internal analysts.

A study examined the interaction between fund managers, analysts and brokers to see if it was possible to interpret any specific schemes. Fund managers experienced it being impossible to keep up with all information related to all stocks, resulting in acquiring information from analysts and brokers. It was possible to identify interaction patterns between the parties. Brokers passed on analyses and generated reports or recommendations to fund managers, that were written by analysts (Lai, 2006). In addition, sell­side organizations arranged company lunch presentations where fund managers got access to company management (cf. Blomberg, Kjellberg, and Winroth, 2011).

Discussions with company management allows fund managers to understand strategy and management capabilities (Barker, 1998; Holland and Doran, 1998), therefore being ranked as the most important source of information (Barker et al., 2012;

Barker et al., 2012; Drachter, Kempf, and Wagner, 2007). Another study has shown that fund performance has been positively linked to frequent company­meetings (Switzer and Keushgerian, 2013). Fund performance among small cap managers have been positively linked to direct company sources (Drachter, Kempf, and Wagner, 2007).

To summarize, previous studies show that fund managers have to make decisions in highly uncertain information environments. They are overwhelmed by ambiguous

information, but reduces uncertainty by including different sources. Although analysts and brokers played important roles in distributing information, fund managers had most confidence on company management. Empirical research indicates that the size of the managed fund or fund company, and the limited time of fund managers are significant factors in what information sources the fund manager will pick.

2.7.1 Decision­making behavior by active equity fund managers in Sweden

Similar to previous studies above, a study by Fröberg (2016) investigates decision­

making by fund managers. However, this Section will discuss her findings in more detail due to three main reasons. Firstly, her study is the only one that has a very similar delimitation and focus as this thesis, i.e. active equity fund managers in Sweden, so her findings will add value when conducting interviews and discussing results. Secondly, her study looks at similar factors as this study, i.e. fund managers’

information acquisition and market beliefs. Thirdly, it was published 2016 which is very current in comparison to other studies on the subject.

The first part of the study by Fröberg investigated how Swedish fund managers acquired information in their daily work. Direct observations of four equity fund managers and in­depth interviews with six showed four main information sources:

sell­side, buy­side, company and news feed. Next, a questionnaire was sent out to 71 equity fund managers in Sweden. The questionnaire­result showed that they differed in how they acquired information from sell­side, buy­side and companies. Individual experience, perceived value of processed information and environmental factors (fund size, geographic focus and small cap focus) were identified as reasons to why they differed in how they acquired the information.

The second part of the study by Fröberg evaluated if there was any relationship between fund managers’ information acquisition behaviors, market beliefs and risk attitudes. The questionnaire responses showed that there was no statistically significant relationships found. However, the results showed that managers tended to hold fundamental views of the markets and were not willing to take risk.

The third part of the study by Fröberg searched for linkage between fund performance and (1) information acquisition behavior, (2) market belief and (3) risk attitude.

However, our study simply aims to investigate decision­making behavior and not its relation to fund performance, making this part irrelevant.

By investigating decision­making amongst Swedish fund managers during the COVID­

19 volatility environment, our study might produce findings that may contrast to previous studies on this subject. If not, it is still an unexplored area of studies and would provide valuable information.

2.8 COVID­19 and the stock market

The COVID­19 pandemic is relatively new, and still ongoing which is why little research regarding our research questions have been made. However, a study by Huo and Qiu (2020) analyzed how investors reacted to the announcement of COVID­19 and if there were differences between different types of investors. Their study concluded that overreactions on the Chinese stock market are stronger for stocks with lower institutional ownership. Indicating that the volatility was mainly driven by retail investors (non­institutional i.e., individual) which means that institutional investors allocate assets differently. This conclusion is an incentive to further investigate if the same holds for the Swedish market. The publication is limited to stocks only.

Further, Xiong, Wu and Hou (2020) have studied the market reactions on Chinese listed companies during the COVID­19 and if firm­specific characteristics can be attributed to certain reactions. The study provides evidence that Chinese institutional investors have negative impact on the market reaction to the COVID­19 outbreak. The authors state that this provides additional support to the evidence that institutional investors in china are buy­and­sell speculators and not buy­and­hold investors, which is the opposite from the conclusion of the previous publication. However, it may therefore be interesting to examine how Swedish institutions acts in the same situation, and if individual investors are different. The study is also scoped to the early effects of COVID­19, not throughout the whole year.

2.9 Retail trading during COVID­19

A study by Sadka, Ozik and Shen (2020) found that during the first half of 2020 outflows from US domestic equity funds accumulated to more than $150 billion.

Nevertheless, retail trading increased massively during the year. The fintech trading app Robinhood saw a record of three million new accounts opened during the first quarter of 2020. Increased retail trading was largely made possible due to rapidly expanding fintech innovations in the retail brokerage space. Many traditional brokerage houses, such as Charles Schwab and Fidelity, offered low commissions and one­stop­shop financial apps accessible from smartphones.

In the same study they conclude that retail trading played an important role in dampening market illiquidity during the COVID­19 pandemic. The study further finds that retail trading benefitted from easy access to trading platforms tailored to individual investors, which contributed to lower spreads and price impact of trades during the pandemic. When mobility increased, as most states in the US reopened, the effects from the earlier increase in retail trading were dampened. Further, the level of online activity on five examined retail broker websites (TD Ameritrade, E­trade, Fidelity, Charles Schwab and Robinhood) increased by more than 80% during the first two months of 2021 compared to Q4 2020. Therefore the key takeaway is that retail trading will continue to exhibit significant impact on financial markets in the future.

However, they did not examine how retail investors acted during the pandemic, nor if they had positive returns or not. Such a study can be difficult to perform as it requires large amount of data which is often classified.

2.10 Conceptual framework

The conceptual framework of the study is based on the Literature and Theory review, distilled to an overview of the researched area with the most essential aspects to be covered when interviewing the fund managers.

When assessing investment opportunities investors either use the top­down approach, the bottom­up approach or a mix of these. The most relevant areas of investing have been covered and mapped out to make the foundation of the framework:

• Macro economical­ and global aspects of decision­making; such as expected economical consequences of the pandemic, global trends, independent macro forecasts and monetary policy’s

• Sources of information gathering; such as sell­side analysis

• Evaluation of portfolio allocation and what decision­making is based on; type of investing strategy, such as growth or value investing

• Other aspects of institutional investing which does not affect retail traders; such as outflows of capital and investment mandates

Based on the above mentioned areas the framework will follow a linear approach, starting with initial areas affecting investors and broadest areas in terms of finance and economics, then narrowing it down until the specific investment decisions are made.

Easily explained, the framework starts off with aspects affecting the fund managers overall decision­making, i.e. investment mandate and the type of investment strategy.

This is followed by information gathering, both macro economical information, sector specific information and other sources of information such as specific sell side analysis.

Since all of this regards to gathering information for the fund manager, the categories have been grouped together allowing for different approaches amongst the fund managers within the information gathering part. The conceptual framework ends with more specific and narrow aspects of investments, such as internal analysis of investments and stock picking. In figure 2.10.1 the conceptual framework showing a potential flow of decision making and which areas it may be dependent of is visualized.

The individual areas of the whole framework are based on theory and literature, while all areas and the flow might not be identical for every investor it is a take on parts that decision making may be based on.

Figure 2.10.1: Conceptual framework

The interview design has been constructed in accordance with the conceptual framework, but to cover the whole framework it is created in a similar manner to the

top­down approach of investing. The questions are not asked in such a way that the fund managers can not answer them if they do not use the top­down approach, more so that they are broad in the beginning and then narrowed down.

As said, the majority of the interview question will be based on the above mentioned areas, as it seems to cover most aspects of decision­making when investing.

Nonetheless, in order to evaluate the basis of alpha­generation by fund managers, questions on investment philosophies will be added. Since many investors may have generated high returns during the pandemic, it is relevant to evaluate if the investors may be viewed as alpha­pretenders or not. This will add to the theory by Minahan (2006) of investment philosophies and hopefully separate the chaff from the wheat.

If it is deemed that the investors have clear investment philosophies and not alpha­

pretenders, their decision­making will be more relevant when evaluating their answers and answering the research question. Therefore, the investment philosophy aspect is not deemed to be a independent part of decision­making, rather it is assumed to act as an umbrella affecting the whole investment decision­making process indirectly.

Furthermore, aspects of behavioral finance will be discussed as it is a common issue amongst all types of investors. For example, investors may suffer from for example herding behavior or overconfidence.

Methodology

In this chapter the methodology used in the thesis is presented and explained. This thesis focuses primarily on qualitative aspects. The methods will cover the literature review as well as the semi­structured interviews.

3.1 Methodological approach

This paper intends to study and analyze the decision­making of Swedish mutual fund managers during the market correction of 2020. This study seeks to investigate a rather unexplored area, as it recently happened, while it remains highly topical. The chosen approach includes a literature review in order to gain an understanding of the existing research about the topic, and to present that knowledge as a written report.

This will help in building knowledge in the specific field to be used when analyzing the results and findings. The literature review is followed by the empirical part of the study.

An abductive research approach seemed most suitable given the nature of the research objective. The abductive approach moves iteratively between the inductive and deductive reasoning approach in order to gradually reach a reasonable explanation of the questions at issue (Blomkvist and Hallin, 2015). In other words, abductive methods advocate confronting theory from empirical observations and expanding new theory by testing developed hypotheses. This approach is believed to benefit the study due to its seeking of a cause­and­effects relationship.

As illustrated by Figure 3.1.1, the abductive research process allows to build and restructure the theoretical framework (named conceptual framework in this thesis)

Figure 3.1.1: Abductive Research Process (Spens and Kovács, 2006)

during the entire research development.

The method for the study will follow the flow­chart for the abductive reasoning, Figure 3.1.1, where the initial point is writing the theory and literature review about the subject (”Review prior theoretical knowledge”). The empirical study will be done through interviews with people from the financial industry, namely fund managers.

Conclusively, this study aims to either create new knowledge about the topic or simply add more evidence to existing knowledge/theory.

3.2 Research design

In order to answer the specified research questions exhaustively and fulfill the purpose of the research, the study will deep dive in the qualitative aspect of investment decisions. It will constitute of six interviews with active fund managers who were operating funds during the market correction of 2020 to bring additional experience to the table. The purpose of the interviews is to thoroughly understand fund managers’

reasoning to how and why certain decisions were made, in terms of financial decisions, during the market correction of 2020.

By conducting the interviews, the study will have first­hand information and quotes from experienced fund managers. The study focuses mainly on Swedish mutual fund managers with various amounts of experience, with some working in the financial

industry from the beginning of the 80s. Even if all of their answers might not be based on theory, it will still give insight to knowledge not easily accessible for the average investor. Based on the insights from the interviews, the study will hopefully result in finding key­aspects for decision­making.

3.3 Theory and Literature Review

The theory and literature review is conducted and reconstructed throughout the entire process of the study. This part will involve theory about the subject of the study, in order for the reader to get a deeper understanding of the research area. The section will also include reviewing previous empirical studies on mutual fund decision­making and other subjects surrounding it. Due to the theory and literature review section being iterative, new themes may be added when aspects that are not mentioned before are discussed during the interviews.

The theory and literature review will then form a base for constructing a conceptual framework. The conceptual framework is basically how the different areas in the theory and literature review are connected to each other. The interview questions will then be based on this framework.

3.4 Qualitative Research Procedure

The empirical data in this study will be gathered through interviews with fund managers. This Section covers the case study approach, what it is, in what way this study fits with the characteristics of a case study as well as a discussion of potential issues when conducting case studies. Further, the interview approach will be covered and the interview coding method, inspired by Denscombe (2010), will be presented and explained.

3.4.1 Case study

Denscombe (2010) describes the characteristics of a case study. Generally a case study focuses on one instance of something that has occurred, in this case it is fund managers decision­making during the COVID­19 market correction. The logic behind focusing on primarily one instance and not using a wide spectrum is that there may be insights

to learn from looking at that one case, which can have wider implications. In the case of this study, the goal is that the findings may be applied for future market corrections and during uncertain periods in the market. Further, it is important that the case is defined and has specific boundaries so it stays separated from other related topic.

This study has clear limitations; Swedish fund managers decision­making during the market correction of 2020 (for the exact limitations, see Section 1.4). The significance of conducting detailed and in­depth studies are highlighted by Denscombe (2020).

Comparing a case study with a standard survey, the case study has the opportunity to go far more into detail and uncover things that would not have been uncovered with more superficial research approaches. Further, using a case study approach one can unravel complex situations and explain why certain outcomes happened, rather than only tell what has happened. For this study it is important to both understand what the fund managers did, as well as the reasoning behind their actions. Fund managers decision­making and reasoning is a complex area with many interlinking parts rather than isolated aspects which is why a case study approach seemed highly suitable. Lastly, the case should not be a situation that is artificially generated, rather it should be something that already exists. The market correction of 2020 has already happened and it is reasonable to believe more market corrections will occur in the future.

When choosing a case to examine, the initial base needs be relevant for a practical problem. The purpose and reasoning behind this thesis can be read in Section 1.3. Even if it is clear that the particular case is relevant for a practical problem there are other aspects that are considered when choosing a particular case. In this study, choosing to investigate fund managers decision­making during the market correction of 2020 is arguably an ”extreme instance” as Denscombe (2010) explains it. The specified factor, the focus area, for this thesis is that the market correction was intense and extremely volatile, not something that is typical for the stock market on an everyday basis. The idea is that this research topic may provide contrast to decision­making during normal market circumstances.

Even if a case study is able to provide value and deal with complex situations, scepticism regarding the generalizability of the study may arise. Denscombe (2010) covers three major areas regarding generalizability of case studies. Firstly, the representativeness of a case study may be questioned. Since this thesis is unique in

the sense that only six fund managers were interviewed, the findings of the study can perhaps not be generalized to represent every fund manager, as investment decision­

making is subjective. This case study should be viewed as an observation of fund managers decision­making and open up for potential areas for further research. The applicability of the findings from the case study on other fund managers depends on how much they have in common. The findings may to some extent be applicable on other fund managers, but their characteristics has to be near identical to the characteristics of the managers in this study. So applying the findings on, e.g., hedge fund managers would not be suitable since they do not share the same characteristics.

There are several advantages with conducting case studies compared to many other types of research approaches. Firstly, the main benefit of case studies is that it allows the researcher to deal with subtleties and complex situations in a way that is not possible, e.g. with surveys. The analysis is also holistic, rather than based on isolated factors. The case study approach is suitable when the researcher has small control over events. The above fits well with this thesis, as the market correction of 2020 was a natural occurrence and the goal was to have thorough interviews with fund managers to evaluate their decision­making during that period. The complex area of decision­

making can therefore be studied in detail through a case study, compared with other approaches.

Conducting a case study has its disadvantages as well. As stated earlier, the credibility of how far one can generalize the findings is often criticized in case studies. It is undoubtedly difficult to generalize the findings from six fund managers to the whole group of Swedish fund managers, but it is not the goal of this study. The goal is to uncover new findings regarding fund managers decision­making process and to set a foundation for potential future research. Setting the boundaries for the case study is also brought up as a disadvantage of the approach. In this study, the boundaries and limitations have been clear from the start, which can be found in detail in Section 1.4.

Further, the replicability may be an issue for case study but it is covered more in detail in Section 3.4.4 and 6.3.

3.4.2 Interviews and data collection

Boyce and Neale (2006) describes interviews as a qualitative research technique that involves ”conducting intensive individual interviews with a small number of respondents to explore their perspectives on a particular idea, program or situation”.

The qualitative empirical part will consist of data gathered through semi­structured interviews with fund managers in Sweden. As Denscombe (2010) describes it, interviews are good when collecting data from opinions and experience, while at the same time covering information that is potentially sensitive and privileged. In this study most of the information comes from the fund managers own experience and opinions. This is not information that is easy to obtain since most of it is personal and sensitive to the fund managers. Lastly, the data yielded from the interviews may be considered as privileged since they can provide information that no one else can.

Therefore, interviews are viewed as a good approach to collect empirical data for this study. The interviewer and respondents will engage in a formal interview, however, the interview design will consist of a shorter list of open­ended questions and topics.

The exact interview design, which is defined as the Interview design, can be found in Section 3.6.

The benefit of a semi­structured approach is that it has the advantage of both an unstructured interview as well as a structured interview. The structured part of the interview means having a carefully thought out questionnaire design in order to maintain an objective comparison between the interviewees, which is a mean of reducing biases in the study (Edwards and Holland, 2013). Meanwhile, the unstructured part allows the interviewers to add more questions during the interview in order to clarify and/or further expand a certain topic. Having a base structure with questions and at the same time allowing the interview to deviate in certain directions during times as it may fit the interviewee and responses better is why the semi­

structured format was chosen (Kallio et al., 2016). Having semi­structured interviews will ensure the same type of base structure to easily compare answers from the different interviews, while also allowing the interviewees to have longer and more nuanced answers.

Due to the COVID­19 pandemic being ongoing, the interviews have been conducted virtually with video and audio. This may result in difficulties to analyze the fund managers body language and emotions, compared to conducting face­to­face

interviews. Since there are two people conducting the interviews in this study, one focuses on interviewing while the other transcribes what is said to maintain well written and accurate notes. This helps to mitigate the transcription error which can arise if one person leads the interview while also transcribing the answers. The selected questions for the semi­structured interviews and interview topics will be sent out in advance, allowing the interviewees to prepare material which should result in better discussions.

Denscombe (2010) describes a practical problem when conducting interviews, which is how to know if the interviewee is telling the truth and if the data then is valid or not. There is no absolute way of knowing if the fund managers actually tell the truth or not. One way to check validity can be to corroborate the data with other sources of information. Since the answers from the interviews in this study are highly subjective it is difficult to check with other sources and conduct proper triangulation.

Nonetheless, gathered data from each interview will be checked with data from the other interviews. Potential ”outliers”, or answers which are very different from the rest, will be highlighted and discussed. Further, the data should be checked for plausibility. Denscombe (2010) describes how this is mostly relevant when conducting interviews with people who might not be experts in their field. In this study, the chosen interviewees are fund managers and there are no better subjects to interview for this study. Therefore, it is reasonable to believe that they have great knowledge in the area and that the data has high plausibility.

Each interviewee will be informed that they are allowed to see the material gathered from the interview. They will also be informed that they may cancel the interview at any time or ask for parts to be excluded. To ensure that the interviewees feel safe and can answer truthfully, the interviewed fund managers will be anonymous, which also reduces potential bias due to personal interests.

3.4.3 Interview Coding Method

When all of the interviews are conducted and transcribed, the coding procedure will take place. The analyzing and coding of the data is inspired by the methods described by Denscombe (2010). Firstly, parts of the transcribed interviews will be assigned to specific categories that will allow to see which data refers to the same topic in a broad sense. This is referred to as open coding, but the codes are open to change and

refinement as research progresses. Initially, the codes will be based on the theoretical chapter of this study and previous empirical research, resulting in a somewhat concept­

driven coding. When the open coding is done, axial coding will be conducted which is done through more granular inspection to identify relationships between coded parts.

This is done to find key components in the empirical data. Lastly, the focus is only on the parts being most vital to explaining the research questions and that can uncover findings of the study.

3.4.4 Transparency criteria in qualitative research

Aguinis and Solarino (2019) developed a framework consisting of 12 criteria for conducting transparent qualitative research. The 12 criteria are applicable and sufficiently broad to assess transparency in many types of qualitative methods but not all of the criteria are relevant for every type of replicability. To achieve exact replication, all of the criteria are relevant. This means a study is replicated using the same population and the same procedures, thus exact replication cannot be achieved for this study since the interviewed fund managers are anonymous. Empirical replication is when a study is replicated using the same procedures but with a different population. Lastly, conceptual replication of a study means that the same population is used but with different procedures. For this study, having transparency to achieve empirical replication is most relevant since, as stated, the interviewees are anonymous.

The framework of 12 criteria (Aguinis and Solarino, 2019) is presented below:

1. Kind of qualitative method ­ e.g. action research, case study, grounded theory

2. Research setting ­ physical, social and cultural milieu of the study

3. Position of researcher along the insider­outsider continuum ­ relationship with the study participants

4. Sampling procedures ­ procedure to select the participants

5. Relative importance of the participants ­ states the main contribution of each participant