Active vs. Passive Investing: Are Danish Active Mutual Funds able to Outperform the S&P 500 Index

Simon Agerkvist Aggerholm

Student thesis: Master thesis


The topic of whether active or passive investing is the superior investments strategy has never beenmore heated than it is today. Index funds are a relatively new way to invest, but Moody’s suggeststhat it will be the dominant investments strategy already by 2024. Scholars, who favors the efficientmarket hypothesis, argue that if markets are efficient, then index investing should be the superiorinvestment strategy. Conversely, scholars of behavioral finance and most investment professionalsargue that the markets are inefficient and thus asset prices may deviate from their fundamental values.Active investors can thus utilize anomalies in the market to obtain abnormal returns. As such, scholarsand investment professionals are heavily debating the theoretical and practical implications of indexinvesting.This thesis analyzes whether Danish active mutual funds are able to obtain a superior risk-adjustedreturn when compared to the S&P 500 index from the beginning of 2006 to the end of 2018. Thethesis analyzes 11 carefully selected Danish active mutual funds based on their monthly returns byusing the five performance measures: Jensen’s alpha, Treynor’s ratio, the Sharpe ratio, Informationratio and Fama & French 3-factor model. All of which are based upon Markowitz’s Modern PortfolioTheory and the CAPM framework. The thesis also tests whether the chosen mutual funds are able toobtain abnormal returns during periods of high volatility. This is done by regressing the returns of themutual funds against the volatility index.The results of this paper show that the selected Danish active mutual funds were unable to obtainabnormal risk-adjusted returns when accounting for all risk. The results are deemed robust through arobustness test, which shows, that the conclusions of the analysis do not change significantly, whenthe risk-free rate and the beta values of the mutual funds are changed. Lastly, the analysis show thatthe mutual funds were unable exploit periods of high volatility to their advantage.In conclusion, the 11 selected Danish active mutual funds were unable to obtain abnormal returns inthe period from the beginning of 2006 to the end of 2018 when compared to the S&P 500. Lastly, asthe mutual funds were also unable to exploit periods of high volatility to their advantage, the mutualfunds seem to have destroyed value for their investors. This paper contributes to existing literatureby testing renown empirical theories in a relatively new market. The findings also heavilycomplement previous findings, which suggests that index investing is the superior investmentsstrategy.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2019
Number of pages92
SupervisorsJens Lunde