Fund Indexing Vs. Active Management: The Results Are

Fortin, Rich; Michelson, Stuart
February 1999
Journal of Financial Planning;Feb1999, Vol. 12 Issue 2, p74
Academic Journal
This paper examines the relative investment performance of mutual funds that are actively managed versus an index approach over various fund classifications through time. The mutual fund data used in this study is a CD ROM database titled Mutual Funds OnDisc obtained from Morningstar. This study used the January 1996 versum containing data from January 1, 1976, through December 31, 1995, on 6,997 mutual funds--essentially the universe of available mutual funds, excluding taxable and tax-exempt money market funds. The expense ratio summarizes all fund expenses except loads and trading costs and includes the management fee, 12b-1 fees, transfer agent fees and accounting and legal fees. It is not surprising that the highest expense ratios that the highest ratios are for the international stock classification, considering the higher search and trading costs associated with these types of funds. The statistical test used here is the paired comparison t-test. A positive value indicates that the actual index return is greater than the average non-index fund return and a p-value less than .05 means this difference is statistically significant at the five percent level. For individual investment categories, all the categories except for small company equity had at least four out of the five time horizons positive and these were generally statistically significant. In terms of the small cap funds outperforming the index, it appears that there are more inefficiencies in the small company equity market, which allows actively managed funds to seek out these inefficiencies and outperform the index.


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