Index Universe – A pair of recent studies on the performance of actively managed mutual funds have confirmed many earlier studies showing that indexing is a better strategy for most investors.
On March 9, research originally published in 2007 by Eugene Fama from the University of Chicago and Kenneth French from Dartmouth was updated. The revised study is titled “Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates.”
(The paper can be downloaded free here.)
The two academics use data from the Center for Research in Security Prices, or CRISP, to look at mutual fund returns from 1962–1996.
Using regression analysis, the researchers basically conclude that when all appropriate factors are taken into account, active fund managers as a whole have added zero additional value over market returns.
They find typical testing methods that look only at persistence in return histories have weaknesses.
