Active mutual funds in Denmark – are the critics right? An empirical investigation of the evidence behind the critical claims of poor performance and closet indexing in 14 of the largest domestic equity funds in Denmark

Andreas Vestergaard

Student thesis: Master thesis


This paper investigates the empirical evidence behind the critical claims of the Danish mutual funds for being mostly passive and generating poor performance. Based on the analysis of activeness and performance, the historical correlation between the two measures is analysed to reveal if there is support for using Active Share to identify the future outperforming managers as suggested by Cremers & Petajisto (2009). The empirical findings are used in a qualitative discussion of investments in active mutual funds, and how to select the best future performing funds. It is found that most of the funds are primarily following passive investment strategies despite being marketed as active. 12 out of 14 funds are labelled as “closet index funds”1. Despite the low activeness in the funds, on average, they have generated statistically significant outperformance relative to benchmark index in the trailing 1, 3 and 5-year period while they have performed neutrally in the trailing 7-year period. On all four periods analysed (1, 3, 5 and 7-year), the most active funds have outperformed the rest of the group, with a margin of up to 8% p.a. These findings are compared with existing literature and used to qualitatively discuss active investment management in Denmark, which results in the following suggestions: The investors should not drop the active funds, as they have demonstrated significant superior historical performance and there is evidence that the best funds can be selected based on their activeness. To select the best active funds it is found that investors should combine Active Share and cost (TER), to calculate a proposed new measure, Active Cost Ratio, which can be used to select the funds that are best positioned to deliver future outperformance.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2013
Number of pages82