On Excess Return in the Actively Managed Mutual Fund Market

The aim of this paper is to focus on whether certain actively managed mutual funds can achieve alpha or outperform the market. With selected historical monthly return data from 268 funds since inception, individuals can use... [ view full abstract ]

The aim of this paper is to focus on whether certain actively managed mutual funds can achieve alpha or outperform the market. With selected historical monthly return data from 268 funds since inception, individuals can use the fund’s market risk, size, value, profitability, and investment to determine the expected return on this particular fund. Building on a rapidly growing literature from Fama and French, we examine these five factors through the scope of the five factor model. The present paper provides a practical and robust framework for analyzing active fund asset prices over time. Through the use of unbalanced panel fixed effect multiple variable regressions on fund, year and month, we find a statistically significant alpha when holding year constant. Our results indicate a positive alpha when controlling for aggregate year trends, thus illustrating the influence of macroeconomic conditions that change between years. This has a substantial effect on asset prices.