Back
 JFRM  Vol.8 No.2 , June 2019
Active vs. Passive Funds—An Empirical Analysis of the German Equity Market
Abstract:
The purpose of this study is to capture value created by active funds in the German investment fund market. A sample of n = 194 actively managed funds is investigated to assess relative superior or inferior performance. For each actively managed fund, percentage changes in closing share prices for various investment periods are recorded and together set against the performance of the passive market. A benchmark is created out of the arithmetic mean of four passive exchange-traded funds representing more characteristics of the market than the S & P500 or DAX. Further bench-mark comparison is conducted with generally accepted Market Research Returns, and various performance calculation measures are presented. Risk-adjusted performance results show that active funds can and do create value in terms of abnormal returns, but these are mostly offset by expenses. Regression results prevent a rejection of the null hypothesis, indicating that active funds in general do not create significant value in form of alpha.
Cite this paper: Fahling, E. , Steurer, E. and Sauer, S. (2019) Active vs. Passive Funds—An Empirical Analysis of the German Equity Market. Journal of Financial Risk Management, 8, 73-91. doi: 10.4236/jfrm.2019.82006.
References

[1]   Basu, S. (1977). Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis. The Journal of Finance, 32, 663-682. https://doi.org/10.2307/2326304

[2]   Blanchett, D. M., & Israelsen, C. L. (2007). Spotlighting Common Methodological Biases in Active vs. Passive Studies. Journal of Financial Planning, 20, 64-74.

[3]   Brinson, G. P., Hood, L. R., & Beebower, G. L. (1995). Determinants of Portfolio Performance. Financial Analysts Journal, 51, 133-138. https://doi.org/10.2469/faj.v51.n1.1869

[4]   Brown, S. J., Goetzmann, W. N., Ibbotson, R. G., & Ross, S. A. (1992). Survivorship Bias in Performance Studies. The Review of Financial Studies, 5, 553-580.
https://doi.org/10.1093/rfs/5.4.553

[5]   Carhart, M. M. (1997). On Persistence in Mutual Fund Performance. The Journal of Finance, 52, 57-82. https://doi.org/10.2307/2329556

[6]   Chan, K. C., Gup, B. E., & Pan, M.-S. (1997). International Stock Market Efficiency and Integration: A Study of Eighteen Nations. Journal of Business Finance & Accounting, 24, 803-813. https://doi.org/10.1111/1468-5957.00134

[7]   De Bondt, W. F. M., & Thaler, R. (1985). Does the Stock Market Overreact? The Journal of Finance, 40, 793-805. https://doi.org/10.1111/j.1540-6261.1985.tb05004.x

[8]   Elton, J. E., Gruber, M. J., & Blake, C. R. (1996). Survivorship Bias and Mutual Fund Performance. The Review of Financial Studies, 9, 1097-1120.
https://doi.org/10.1093/rfs/9.4.1097

[9]   Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25, 383-417. https://doi.org/10.2307/2325486

[10]   Fama, E. F., & French, K. R. (2010). Luck versus Skill in the Cross-Section of Mutual Fund Returns. The Journal of Finance, 65, 1915-1947.
https://doi.org/10.1111/j.1540-6261.2010.01598.x

[11]   Fuller, R. J., Han, B., & Tung, Y. (2010). Thinking about Indices and “Passive” versus Active Management. The Journal of Portfolio Management, 36, 35-47.
https://doi.org/10.3905/jpm.2010.36.4.035

[12]   Grinblatt, M., & Titman, S. (1989). Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings. The Journal of Business, 62, 393-416. https://doi.org/10.1086/296468

[13]   Grinblatt, M., & Titman, S. (1992). The Persistence of Mutual Fund Performance. The Journal of Finance, 47, 1977-1984. https://doi.org/10.2307/2329005

[14]   Grossman, S. J., & Stiglitz, J. E. (1980). On the Impossibility of Informationally Efficient Markets. The American Economic Review, 70, 393-408.

[15]   Gruber, M. J. (1996). Another Puzzle: The Growth in Actively Managed Mutual Funds. The Journal of Finance, 51, 783-810. https://doi.org/10.1111/j.1540-6261.1996.tb02707.x

[16]   Hendricks, D., Patel, J., & Zeckhauser, R. (1993). Hot Hands in Mutual Funds: Short-Run Persistence of Relative Performance, 1974-1988. The Journal of Finance, 48, 93-130.
https://doi.org/10.1111/j.1540-6261.1993.tb04703.x

[17]   Investmentfonds-Datenbank. https://portal.mvp.bafin.de/database/FondsInfo

[18]   Jensen, M. C. (1968). The Performance of Mutual Funds in the Period 1945-1964. The Journal of Finance, 23, 389-416. https://doi.org/10.1111/j.1540-6261.1968.tb00815.x

[19]   Lim, T. C., Lim, X. Y., & Zhai, R. (2012). History of the Efficient Market Hypothesis. International Journal of Management Sciences and Business Research, 1, 26-33.

[20]   Malkiel, B. G. (1995). Returns from Investing in Equity Mutual Funds 1971 to 1991. The Journal of Finance, 50, 549-572. https://doi.org/10.2307/2329419

[21]   Malkiel, B. G. (2003). Passive Investment Strategies and Efficient Markets. European Financial Management, 9, 1-10. https://doi.org/10.1111/1468-036X.00205

[22]   Malkiel, B. G. (2005). Reflections on the Efficient Market Hypothesis: 30 Years Later. The Financial Review, 40, 1-9. https://doi.org/10.1111/j.0732-8516.2005.00090.x

[23]   Pástor, L., & Stambaugh, R. (2002). Mutual Fund Performance and Seemingly Unrelated Assets. Journal of Financial Economics, 63, 315-349. https://doi.org/10.1016/S0304-405X(02)00064-8

[24]   Philips, C. B., Kinniry, F. M. Jr., & Walker, D. (2014). The Active-Passive Debate: Market Cyclicality and Leadership Volatility. https://personal.vanguard.com/pdf/ISGACT.pdf

[25]   Read, C. (2013). The Efficient Market Hypothesists: Bachelier, Samuelson, Fama, Ross, Tobin and Shiller. Basingstoke: Palgrave Macmillan. https://doi.org/10.1057/9781137292216

[26]   Schädler, T. (2018). Measuring Irrationality in Financial Markets. Archives of Business Research, 6, 252-259.
https://doi.org/10.14738/abr.612.5876

[27]   Sewell, M. (2011). History of the Efficient Market Hypothesis (Research Note No. RN/11/ 04). London: UCL Department of Computer Science.
http://www.cs.ucl.ac.uk/fileadmin/UCL-CS/images/Research_Student_Information/RN_11_04.pdf

[28]   Sharpe, W. F. (1991). The Arithmetic of Active Management. Financial Analysts Journal, 47, 7-9. https://doi.org/10.2469/faj.v47.n1.7

[29]   Shukla, R. (2004). The Value of Active Portfolio Management. Journal of Economics and Business, 56, 331-346. https://doi.org/10.1016/j.jeconbus.2004.01.002

[30]   Wermers, R. (2000). Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses. The Journal of Finance, 55, 1655-1695. https://doi.org/10.1111/0022-1082.00263

[31]   Womack, K. L. (1996). Do Brokerage Analysts’ Recommendations Have Investment Value? The Journal of Finance, 51, 137-167. https://doi.org/10.2307/2329305

 
 
Top