Active versus passive investing in emerging markets : an empirical study of the relationship between mutual fund performance and the degree of active fund management in emerging markets

Abstract

The debate whether active funds add value compared to passive funds has mostly been limited to developed markets. In this study, we use a panel dataset to investigate whether emerging markets mutual funds’ performance is positively related to their degree of active fund management. The scope is limited to all-equity mutual funds that invest broadly in emerging markets as opposed to mutual funds that invest in debt or have geographically concentrated portfolios. This is done to ensure adequate comparability between the mutual funds we examine. We find no significant performance differences between “closet indexers” (funds with active share below 60%) and truly active mutual funds. Further, regression results show limited to no relationship between the mutual funds’ performance and their degree of activity. In sum, our findings suggest that the activity metrics Active Share and Tracking Error are not suitable to explain mutual fund performance in emerging markets. As a sub-analysis, we also investigate whether there are some mutual funds that consistently outperform the market. We find that across a 10-year period, only one out of 88 mutual funds in our sample managed to do so.