Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Actively Managed Mutual Funds
44 Pages Posted: 14 Sep 2018 Last revised: 18 Jan 2019
Date Written: January 17, 2019
Just over 20 years have passed since the publication of Carhart’s landmark study on mutual funds (Carhart, 1997). Its conclusion—that the data did “not support the existence of skilled or informed mutual fund portfolio managers”—helped form the ‘conventional wisdom’ that active management does not create value for investors. In this paper, we review the academic literature on active mutual fund management since the publication of Carhart (1997) to assess the extent to which current research still supports the conventional wisdom.
Taken as a whole, our review of the current academic literature suggests that the conventional wisdom is too negative on the value of active management. The literature that followed Carhart (1997) has documented that active managers have a variety of skills and tend to make value-added decisions, such that, after accounting for all costs, many actively managed funds appear to generate positive value for investors. While the debate between active and passive is not settled and many research challenges remain, we conclude that the current academic literature finds active management more promising for investors than the conventional wisdom claims.
Keywords: Active Management, Mutual Funds, Skill, Alpha, Value
JEL Classification: G10, G11, G14, G20, G23
Suggested Citation: Suggested Citation