Active fund management or passive index cruising?

Abstract

How should an investor pick funds to invest in? What is the best strategy, picking active or passive funds? It’s hard to navigate the fund landscape when there is ambiguous evidence and advice coming from different directions. Do fund managers outperform the market and passive funds? Do they bring something extra of value to the table in regards to their high management fees? The question seems almost age-old at this point, from dart throwing monkeys outperforming high profile fund managers to famous investors proclaiming that active fund management is dead, it’s hard to know what is really true about active versus passive fund management. Over the last 20 years the popularity of equity funds has exploded, mutual equity fund savings in Sweden has tripled in just 10 years, going from1000 billion SEK to over 3000 billion SEK. 76% Of the Swedish population purposely invest in funds and 70% of this is invested in equity funds. In this interesting and rapidly growing market we want to investigate whether active fund management is superior or if passive cruising in index funds should be your go-to investment strategy. This is intriguing and important since nobody seems to reach a conclusive answer, time periods researched are old and we find few studies that use Swedish market fund data. Hence, we study the performance of passive and active mutual equity funds on the Swedish market from 2010 to 2020. We use some basic methods, like the Capital Asset Pricing Model based Single-Index Model,Sharpe Ratio,Treynor Ratio but also some more complicated models like the Fama French Three-Factor Model and the Carhart Four-Factor Model.