Do Active Mutual Funds Mimic The Index During A Bull Market?

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none; tab-stops: 116.75pt 163.55pt;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">This study seeks to determine whether during a bull market, large actively-managed mutual funds 1) mimic the composition of the S&P 500 Index and 2) mimic the risk attributes of the S&P 500 Index.<span style="mso-spacerun: yes;">  </span>Employing a panel data set of volatility and MPT statistics for 200 large, actively-managed US equity and hybrid debt-equity mutual funds between 1995 and 2000, we find no evidence of fund portfolio composition converging toward that of the index.<span style="mso-spacerun: yes;">  </span>Indeed, as the bull market advances, <span class="italic">fund managers move progressively away from holding securities comprising the S&P 500 Index.<span style="mso-spacerun: yes;">  </span>Our results also reveal levels of fund systematic risk that are lower and significantly different to that of the S&P 500 Index, while fund pseudo-industry risk levels (as proxied by technology holdings) are not significantly different to that of the S&P 500 Index.<span style="mso-spacerun: yes;">  </span>This suggests that managers mirrored S&P 500 Index technology weights with the purchase of technology firms outside of the Index.</span></span></span></p>