1 xvi. another puzzle: the growth in actively managed mutual funds
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XVI. Another Puzzle: The Growth In Actively Managed Mutual Funds
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THE PERFORMANCE OF PUBLICLY OFFERED COMMODITY FUNDS
Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Financial Analysts Journal, July-August 1990.
NEW PUBLIC OFFERINGS, INFORMATION, AND INVESTOR RATIONALITY: THE CASE OF PUBLICLY OFFERED COMMODITY FUNDS
Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Journal of Business, 1989.
PROFESSIONALLY MANAGED PUBLICLY TRADED COMMODITY FUNDS
Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Journal of Business, April 1987.
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EFFICIENCY WITH COSTLY INFORMATION: A REINTERPRETATION OF EVIDENCE FROM MANAGED PORTFOLIOS
Edwin J. Elton, Martin J. Gruber, Sanjiv Das, and Matthew Hlavka, The Review of Financial Studies, 1993.
THE PERFORMANCE OF BOND MUTUAL FUNDS
Christopher R. Blake, Edwin J. Elton, and Martin J. Gruber, Journal of Business, July 1993.
FUNDAMENTAL ECONOMIC VARIABLES, EXPECTED RETURNS, AND BOND FUND PERFORMANCE
Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake, Journal of Finance, September 1995.
SURVIVORSHIP BIAS AND MUTUAL FUND PERFORMANCE
Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake, The Review of Financial Studies, 1996.
THE PERSISTENCE OF RISK-ADJUSTED MUTUAL FUND PERFORMANCE
Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake, Journal of Business, April 1996.
ANOTHER PUZZLE: THE GROWTH IN ACTIVELY MANAGED MUTUAL FUNDS
Martin J. Gruber, Journal of Finance, July 1996
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AVERAGE PERFORMANCE
INDEX FUNDS
CLOSED END FUNDS
THE PERSISTENCE OF PFORMANCE
EXPENSES
WHAT ACCOUNTS FOR CASH FLOWS
HOW WELL DO INVESTORS DO
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Customer Services – Including Record Keeping, The Ability To Move Money Around Among Funds, and Daily Valuation
Low Transaction Costs
Low Cost Diversification
Professional Management (Security Selection)
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OPEN END MUTUAL FUNDS SELL AT
NET ASSET VALUE. IF “GOOD
MANAGEMENT” EXISTS, A FUND
WHICH HAS SUPERIOR
MANAGEMENT WILL SELL AT NET
ASSET VALUE. IF BAD
MANAGEMENT EXISTS, A FUND
WHICH HAS INFERIOR
MANAGEMENT WILL SELL AT NET
ASSET VALUE. MANAGEMENT IS
NOT PRICED.
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INDEX FUNDS
1985 3 S&P FUNDS1.24%
1 SMALL STOCK0.88%
NO GROWTH, VALUE,
OR BOND FUND
1994 OVER 100 INDEX FUNDS
44 S&P FUNDS 0.19% TO
1.35%
GOOD TRACKING (R2=.997)
LOW COST
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A. A SOPHISTICATED CLIENTELE
B. A DISADVANTAGED CLIENTELE
1. UNSOPHISTICATED INVESTORS
2. INSTITUTIONALLY DISADVANTAGED INVESTORS
3. TAX DISADVANTAGED INVESTORS
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Taxes and the Advantage of Passive Management
Active management turns over portfolios about once a year
Passive management buys and holds
Passive management gets to compound returns on before capital gains taxes value
If taxes are high enough and horizon long enough, then passive management is better than active management with reasonable estimates of alpha
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Model of Horizon Values – Assumptions
Tax on dividends paid once a year
For active funds tax on capital gains paid once a year
For passive funds tax on capital gains paid at horizon
Investor reinvests all funds net of taxes end year where
V0 = starting investment at time 0,
IVN = end of horizon after tax wealth if invested in index funds,
AVN = end of horizon after tax wealth from active management,
RM = return on the market including dividends,
RE = the expense ratio for index funds,
RD = dividend yield,
RA = extra return from active management,
TI = tax on dividends,
TCG = tax on capital gains,
N = number of years in investment horizon
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Index Funds
0 1
1 1 01
]
1 1
[ 1
N
N M E D CG
N
D t CGt
IV V R R R T T
R V T V T
where
tIDEMt TRRRV 10
Active Management
NIDCGDAMN TRTRRRVAV 1110
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