Finance professors at the Yale School of Management have devised a way to measure the active management of mutual funds, and it shows that nearly one-third of the U.S. mutual fund industry is what could be called "closet indexers" - funds that claim to be actively managed but passively invest most of their assets in a benchmark index, Yale said on Monday.
Truly active funds account for only about one-quarter of the industry, it said. Furthermore, the Active Share technique significantly predicts fund returns, showing that only the most active funds outperform their benchmark indexes while all other active funds underperform after expenses, the management school said.
"Many investors are paying high fees for the alleged benefits of active management, but they end up getting a mostly passive portfolio that hugs the benchmark index with only a small active part," Antti Petajisto, a faculty member who created the Active Share measure with Martijn Cremers, said in a press release.
Their study, "How Active is Your Fund Manager? A New Measure That Predicts Performance," is available online at:
The study confirmed the conventional wisdom that smaller funds are more actively managed, while a significant number of large funds, particularly those with more than $1 billion of assets, are "closet indexers."
