Date of Award

Spring 2020

Degree Name

Bachelor of Science (BS)

Advisor(s)

Jim McCann

Abstract

The purpose of this research paper is to analyze opportunities for active management to deliver alpha in excess of a passively managed index fund with a primary focus on different equity markets. This paper seeks to further the existing research done on active and passive investment styles by providing a more nuanced look at divergences in equity market investing performance. The main research question the paper aims to address is: Which subcategories on equity investing (growth, value, small cap, mid cap, and large cap) have demonstrated consistent ability of active managers to deliver better risk-adjusted returns to investors? The paper begins with an introduction to the highly debated topic of passive investing, which has dominated the investing landscape post 2008. A literature review is then conducted to connect existing research on asset classes and investing styles to develop a preliminary hypothesis for the research’s empirical study. The empirical research utilizes the net performance of the largest mutual fund managers in the different equity subcategories to develop a comprehensive measure of returns from active equity managers. This is compared to passive management in the asset class utilizing the returns from benchmark indexes that are replicated by passive index mutual funds or ETFs. Net performance is adjusted for volatility as a measure of risk to compare net of fees returns from active managers to passive strategies on a risk-adjusted (return/volatility) basis. The goal is to develop a more nuanced understanding on which equity market categories offer alpha opportunities for active managers. Based on a synthesis of the existing research, the hypothesis of this study is that the higher levels of expected market inefficiencies in different equity markets correlate with greater opportunities for alpha generation through active management. Therefore, strategies focused on value or growth along with small and mid-cap focused managers should deliver outperformance relative to passive strategies. The research is important as it will help allocators and investors understand how they can generate returns by in equity markets in excess of the standard market benchmark, if that remains possible. Conversely, if that is proven to not be true, investors can eliminate fee drag from their portfolios during an investment era that seems to be characterized by persistently lower returns. The study’s findings show that there is minimal opportunity for active managers to outperform a passive strategy, regardless of the niche over the long-term. While there is opportunity for managers to outperform, the odds of finding those managers persistently is low.

Download

Share

COinS