Date of Defense

12-9-2022

Date of Graduation

12-2022

Department

Statistics

First Advisor

Joshua Naranjo

Second Advisor

Wayne Stitt

Abstract

With the increased popularity of passive investing, the long-term investment success of active management is being questioned more frequently. For this reason, this research seeks to find whether actively managed funds produce sufficient returns that cover the fees and management costs associated with them. A comparative analysis was made with 5401 actively managed U.S. mutual funds and several common market indices over three, five, and ten-year time spans ranging from 2012 to 2021. Additionally, an analysis was made comparing active and passive management in the recessionary period of 2007 to 2009. Finally, analysis was conducted on annual holdings turnover rates of different mutual fund types to find the correlation these rates have with performance success.

In all the time periods from 2012 to 2021, active management underperformed overwhelmingly compared to common market indices. This indicated that the U.S. stock market is indeed efficient and there is no potential value to be gained from investing actively. However, in bear market conditions, all categories of actively managed mutual funds outperformed the S&P 500 index most of the time. This supported the idea that in bad market conditions, active management is a very attractive investment style. Furthermore, analysis of annual holding turnover rates found that actively managed funds that were less active tended to perform the best.

I deduced that the best investment strategy is a passive approach. Even though the analysis of bear market conditions indicated otherwise, I concluded that there are too many variables when trying to exploit this potential value. Investors would need to know both when to invest and what sectors to invest in, which is much easier said than done. Overall, most investors are better off betting on the success of the entire U.S. stock market and the easiest way to do so is through passive investing vehicles.

Access Setting

Honors Thesis-Open Access

Additional Files
Presentation.pdf (894 kB)
Defense Presentation
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