Active vs Passive Management

Active vs. Passive Fund Management Table of content1. Introduction 2
2. Literature overview 2
3. Diverse Opinions on Active vs. Passive Fund Management 4
3.1 Sample Design 4
3.2 Overview: Active vs. Passive 4
3.3 Trend over past 10 years 5
3.4 Fund management strategy in bear and bull markets 64. Conclusion 6
5. References 81. Introduction
The efficient market hypothesis indicates that securities are fairly priced, given all available information. This implies that historical performance is not a guarantee of future performance, and that the average manager cannot beat a passive strategy. Therefore, excess performance would be the consequence of pure luck, not skill (Wessels & Krige, 2005). Advocates of the efficient market hypothesis consider active fund management as a waste of time, because if stock prices are at fair levels, it is senseless to seek mispriced securities. Due to frequent trading, high brokerage fees are generated without increasing anticipated performance. Thus, a passive fund investment strategy is recommended, which aims at buying a well-diversified portfolio without trying to uncover under or overvalued stocks (Bodie, Kane, & Marcus, 2010). In contrast, the fact that thousands of investment managers are involved in active fund management evokes the belief that the allegedly rational investors in these active funds have to receive benefits (Fortin & Michelson, 2002). During the 90s some studies concluded that actively managed funds possess enough private information to offset their expenses and that persistence in mutual fund performance occurred over short-term horizons (Otten & Bams, 2002). Still today, it is questioned whether the costs entailed in active management can be offset by uncovering any mispricing. This paper investigates the benefits of passive fund management with contributions from a variety of opinions concerning the central debate regarding the preference of active or passive…