The Value of Active Management in Equity Mutual Funds: A Case of Mutual Funds Distributed in the Czech Republic

Abstract

The primary purpose of this study is to evaluate the active management in a mutual fund from the perspective of a Czech retail investor and compare it against their passive alternative. In total, 50 mutual funds and three passive exchange-traded funds (ETFs) were analyzed across three regional groups (Global, American, and European) from July 2011 to June 2021. The data was analyzed through regression utilizing the Fama-French 3 factor model to determine the funds’ alpha, ensuring a fair risk-adjusted comparison of funds. The detailed analysis showed that 13 of the 50 officially active funds are not considered active and may be suspected of so-called closet indexing. Such funds are being paid for active management, which they are not performing. Thus, the client is being deceived and is essentially getting an overpriced index fund. Moreover, it was confirmed that ongoing fee is a negative performance predictor – more expensive funds deliver lower net returns; thus, they cannot justify their cost. The findings mentioned above were consistent among the analyzed groups but were less apparent and significant for the European funds. Lastly, the results were compared with previous research and discussed from theoretical and practical perspectives.