"Is passive investment management the better alternative? Evidence from the small-cap segment of the US equity fund universe"

Abstract

The purpose of this thesis is to ascertain if significant return differences between active- and passive managed investment funds exist. Over a 12 years observation period (2006-2018), alpha coefficients of more than 800 US small cap investment funds were tested. Findings revealed, 0.12% of the mutual funds managed to outperform the S&P SmallCap 600 Index and 76.9% displayed a negative significant risk-adjusted return. Comparing these results with the performance of passive funds confirms a comparative underperformance of mutual funds of 0.31% per month. An additional scenario analysis revealed that the dominance of index- and exchange-traded funds did not exist during the financial crisis 2007 – 2009. The results are showing no significant differences in the movement of returns, which could be explained by a sentiment-driven equity market during financially distressed times. Based on the aggregated results, it leads to the conclusion that passive investment funds are more beneficiary for investors with a long investment horizon but not necessarily superior during financially distressed times.