A comparative analysis of active and passive portfolio management

Abstract

The choice between active and passive portfolio management approaches has been the subject of on-going debate due to scholars stating that a passive style is superior, whilst others stating the opposite. This dissertation’s aim is to identify which management type is superior to the other by comparing the performance of a set of U.S. equity mutual funds over a period of ten years. Data was collected for hundred open-ended equity mutual funds based in the United States of America - fifty of these hundred funds were passively managed, whilst the remaining fifty were actively managed. Three performance metrics, Sharpe ratio, Treynor measure and Jensen’s Alpha were utilised to gauge the performance of these funds. The metrics were calculated for the whole sample for the ten-year period from 2012 till 2021. The measures were also estimated for different sub-periods from 2012 till 2016 and 2017 till 2021, and then divided into two-year time frames starting from 2012. The outcomes from the three performance metrics were analysed and compared. All metrics for the whole period and sub-periods yielded similar results. The result of this study suggests that passive management outperformed the active approach over the sample period. Comparison with the benchmark was also applied, and the outcome suggests that on average the market index outperformed both portfolio management types when using the Treynor measure and Jensen’s Alpha, although not when using the Sharpe ratio.