Stock Selection versus Tracking: A Returns-based Comparison of Actively & Passively Managed Equity Funds

Abstract

Since the rise of passively managed equity funds, investors are able to select their investment from an ever-growing basket of index products. Active fund managers find themselves sailing against the wind in endeavoring to beat the market. However, gaining an edge through research and selective stock picking continuous to define the value added of active fund management. Depending on the market efficiency, stock selection has a varying value potential. The effectivity of research is expected to negatively correlate with the level of market efficiency. Since not all markets and actors within them are exposed to the same quantity and quality of information flows, some markets tend to be more attractive to active fund management than others.