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We consider a model of active asset management in which mutual fund managers exert unobservable effort to earn excess returns. Investors allocate capital to actively managed funds and passively managed products. In equilibrium, investors are indifferent between investing an additional dollar with an active manager or with a passively managed product. As passively managed products become more attractive to investors, active managers’ revenues from portfolio-management services fall, reducing their effort incentives. More-severe decreasing-returns-to-scale are also associated with reduced incentives and increased moral hazard. Performance-based fees and holdings-based data are all unlikely to mitigate moral hazard.

Modern portfolio theory commenced the ensuing debate regarding the benefits of active versus passive management in regards to mutual funds. The two opposing mutual fund management styles claim that they produce superior risk-adjusted performance. The dissertation explores the research question: During the full 1995 to 2008 market cycle, which investment management style, active or passive, produced the better risk-adjusted performance? The significance of this historic stock market period relates to the fact it contains the two greatest bull markets (1995-1999 & 2003-2007) followed by subsequent bear markets (2000-2002 & 2008). The study tested nine hypotheses, derived from the above research question, for the 5 different time periods (1995-1999, 2000-2002, 2003-2007, 2008, and 1995-2008). Based on previous research, one would expect the passive management styles to out-perform the active styles during expansion whereas the performance would reverse during market contraction. The Sharpe composite portfolio performance measure, that combines risk and return into a single value, was used to measure, analyze, and rank risk-adjusted performance. The study, comprised of 45 statistical tests, found that on a risk-adjusted basis that the active indices (proxies for active management) Sharpe ratios were significantly greater than those of the passive indices (proxies for passive management) Sharpe ratios for; 1) the midcap blend category for the periods 1995 to 2008 and 1995 to 1999; 2) the small blend category for the periods 1995 to 2008 and 1995 to 1999, and 3) the small value category for the periods 1995 to 2008, 1995 to 1999, and 2000 to 2002. Therefore, the active indices Sharpe ratio significantly exceeded the passive indices Sharpe ratio for 16% of the statistical tests conducted while the active indices Sharpe ratio did not significantly exceed the passive indices Sharpe ratio for 84% of the statistical tests conducted. The findings suggested that in the long run passive management produced better performance results than active management.

abstract: Since the 2008 financial crisis, the total assets managed by U.S. mutual funds have frequently hit new highs and the industry has become increasingly concentrated. In the meantime, two strategies have emerged in the American mutual fund industry: active and passive management. What factors affect the market shares of firms that adopted these two different strategies? Building on strategic management theories, I suggest that mutual fund families that adopted active and passive management strategies tend to compete in different dimensions. Active management fund families tend to implement the product differentiation strategy, competing on “product quality” through excess-returns, innovative and differentiated fund products; passively managed fund families focus more on "price competition" by conducting an overall cost leadership strategy. This research examines the driven factors of fund families’ market share. The results show that: the market share of actively managed fund families is more sensitive to positive impact of fund performance, while passive management firms are more sensitive to negative effect of management fees and total loads; 12b-1 expense improves the competitiveness of active fund families and thus enhance their market shares but it has negative impact on passive fund families. In addition, high turnover decreases the market share of all fund families, especially for passively managed families. The outcome reveals the latest US mutual industry orientation: products differentiation, turnover, management fee have greater impact on market share while the competition of fund performance is diminishing. The Matthew effect in US mutual fund industry is outstanding. Industrial competition dimension expands from performance and products to cost cutting. Empirical analysis on Chinese mutual fund families is also conducted. Different from the US, there is only small number of mutual fund families targeting passive management products. The results show that the distribution channel has the largest impact on Chinese mutual fund family market share and investors are more willing to chase performance than to consider cost-efficient fund families. This study then analyses reasons behind the difference of Chinese and American mutual fund industries. / Dissertation/Thesis / Doctoral Dissertation Business Administration 2018

Active weight, active expense ratio and active alpha are measures that can be calculated with relative ease for any fund using publicly available data. However, for active weight to be truly useful to an investor the relationship between these quantities and fund performance needed to be explored in greater detail. Furthermore, the costs of South African unit trust funds had not been studied using Miller’s techniques and needed further study. Finally, active weight had not been used to study the evolution of active management over time. Using quarterly South African unit trust fund data this study delivered on the following key findings: that funds with higher active weight provide excess returns to their investors; that funds with a higher active expense ratio do not necessarily provide greater returns; and that the active alpha for South African unit trusts is negatively correlated with fund performance. / Dissertation (MBA)--University of Pretoria, 2012. / Gordon Institute of Business Science (GIBS) / unrestricted

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This article analyzes and compares an overview of the structure and evolution of the international and domestic mutual fund industry for the 2005–2014 period. The aim of this analysis is to identify opportunities for growth and development of the domestic mutual fund industry, in particular, passive management used by index equity funds. / Este artículo analiza y compara, de manera general, la estructura y evolución anual de la industria de fondos mutuos internacional y doméstica durante el período 2005-2014. El objetivo de este análisis es identificar las oportunidades de crecimiento y desarrollo del segmento de renta variable de la industria de fondos mutuos doméstica tomando como referencia el estilo de administración pasiva de las inversiones utilizado por los fondos mutuos indexados de renta variable. / Este artigo analisa e compara, em geral, a estrutura e a evolução da indústria internacional e nacional de fundos mútuos anuais ao longo do período 2005-2014. O objetivo desta análise é identificar oportunidades de crescimento e desenvolvimento dos fundos mútuos de ações na indústria nacional em função dos fundos de índice com gestão passiva de investimentos.