1 Introduction
1.1 Problems and Objectives
Mutual Funds are gaining popularity amongst investors, private and institutional, and being favoured over stocks. Nevertheless empirical studies prove that so called index funds or passive funds on average outperform actively managed mutual funds, since 1968 (Jensen), the majority of all empirical studies strengthen the theory that mutual funds on average do not outperform their benchmarks. It is to analyse why active man-aged funds under perform their passive peers. A further problem is that investors still prefer actively managed funds although it is widely proven that on average active funds underperform their benchmarks.
The objective of this study is to analyse, on the basis of empirical data, the performance of both active and passive managed mutual funds and explain why this divergence takes place. Furthermore is to be explained why investors still choose active funds over index funds.
1.2 Course of the Appraisal
In the first part of this study the main differences between active and passive managed funds, regarding portfolio structure, cost structure and investment strategy, are ex-plained.
Point 2.2 describes the mutual fund industry regarding the increase of assets under man-agement over the last decades and as well is looking at the increasing number of funds entering the market in the last decades.
The following part is an empirical analysis on the mutual fund performance in chrono-logical order, starting in 1945 and continuing, with minor gaps, until 2003, also men-tioning some hypothesis that refer to the observed performance in a specific period of time. In the next paragraph some theories on the performance and market ef ...