The Value of Experience in Actively Managed Mutual Funds

Abstract: In this paper we investigate the relationship between active management, manager experience and fund performance among Swedish all-equity mutual funds between 2003 and 2016. To measure different aspects of active management we combine two measures of active management-active share and tracking error-similar to Cremers and Petajisto (2009). We find the average actively managed fund to, on average, underperform the benchmark index, SIXPRX, when fees are taken into consideration. Examining different degrees of active management, we find active share to be positively correlated with fund performance. We find that the most actively managed funds perform better relative the benchmark index than the less actively managed funds. Although, we do not find the most actively managed funds to perform significantly better than the benchmark index. Thus, we conclude that active share is a predictor of fund performance among actively managed funds. On the contrary, the value of fund manager experience (proxied by manager tenure) is questionable. We find no distinct relationship between manager experience and fund performance. Even conditional the most active funds, the value of manager experience is not pronounced. Overall, our findings suggest that investing in an index fund may be the best option. Even though, we argue that active share should be considered by investors in the selection process of actively managed funds. Lastly, we find a positive relationship between manager tenure and active share. It is, however, difficult to distinguish whether a higher level of active management is really derived from having a more experienced manager or if the most actively managed funds just happen to be managed by more experienced managers.