Do Active Mutual Funds Mimic The Index During A Bull Market?

Abstract

This study seeks to determine whether during a bull market, large actively-managed mutual funds 1) mimic the composition of the S&P 500 Index and 2) mimic the risk attributes of the S&P 500 Index.  Employing a panel data set of volatility and MPT statistics for 200 large, actively-managed US equity and hybrid debt-equity mutual funds between 1995 and 2000, we find no evidence of fund portfolio composition converging toward that of the index.  Indeed, as the bull market advances, fund managers move progressively away from holding securities comprising the S&P 500 Index.  Our results also reveal levels of fund systematic risk that are lower and significantly different to that of the S&P 500 Index, while fund pseudo-industry risk levels (as proxied by technology holdings) are not significantly different to that of the S&P 500 Index.  This suggests that managers mirrored S&P 500 Index technology weights with the purchase of technology firms outside of the Index.