Performance Comparison of Active and Passive Stock Funds

Bruno Ribeiro Castro () and Andrea Maria Accioly Fonseca Minardi ()
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Bruno Ribeiro Castro: Ibmec São Paulo

Brazilian Review of Finance, 2009, vol. 7, issue 2, 143-161

Abstract: We intend to investigate whether active portfolio managers have higher security selection ability than passive managers in Brazil. We built net monthly historical returns and estimated gross historical returns series from January 1996 till October 2006 of 626 stock mutual funds. We used the regression model proposed by Carhart (1997) with the addition of a market timing factor and analyzed the alpha coefficient sign and significance. Our results show that a significant number of managers exploit well-known strategies as size, book-to-market ratio, momentum and market timing. When we use net returns series as the dependent variable, we find that only 4.8% of active portfolios have positive and significant alphas. Active portfolio performance on average is not significantly different than passive portfolio performance. But when we run the regressions using the estimated gross returns, we found that 10.3% of active funds have positive and signi cant alphas, and on average the performance of active funds is significantly positive. Our results are in accordance with Jensen’s (1978) version of efficient market, in which asset prices reflect existing information till the moment when marginal benefits of using information do not exceed marginal costs.

Keywords: security selection; stock mutual fund performance; active portfolio management; market efficiency. (search for similar items in EconPapers)
JEL-codes: G11 G14 (search for similar items in EconPapers)
Date: 2009
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