Norwegian Municipalities' Investments in Capital Markets: An Empirical Study of Norwegian Municipalities’ Investment Portfolios

Summary
Unfamiliar to many, Norwegian municipalities manage substantial investment portfolios totaling 35 billion NOK (3.7B USD). In this thesis we investigate what characterizes Norwegian municipalities' investments in capital markets as well as how they have performed in equity markets. We start by establishing a general overview consisting of assets under management and asset allocation for all municipalities. We observe that total investments in capital markets have increase by 30% since 2003, whereas the largest growth has been in stocks and shares. This paper reveals that investments in stocks and shares have doubled in the last 10 years. From a sample of 37 municipalities, we find that the most prominent drivers of municipal investment in capital markets are gross income per capita and population size.

Further, we find that the average portfolio consists of 70% fixed income and 30% equity, indicating that Norwegian municipalities generally are risk averse. However, we find that there are variations among them, whereas a municipality with higher-income population, higher assets under management-to-assets and income from power companies is less risk averse. When evaluating the municipalities' equity performance, we use the Carhart four-factor model. At a 5% significance level, 2 out of 27 municipalities are achieving positive excess returns, respectively Vennesla and Sokndal. In contrast, Volda is delivering negative abnormal excess returns. However, when applying a persistence analysis, we reveal that there seems to be no evidence of superior skill, implying that the positive (negative) abnormal returns are due to luck (bad luck).