Active versus Passive Management of International Mutual Funds ...

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Global Investment Sector. The data contained surviving funds during the period studied. The
categories were matched to the following passive index benchmarks. The Equity Europe
category was first compared to the DAX, a German stock index for 30 selected blue chip stocks.
The equities use free float shares in the index calculation. The second passive index compared to
the Equity Europe category was the FTSE 100, a capitalization-weighted index of the 100 most
highly capitalized companies traded on the London Stock Exchange. The third index used in the
comparison was the Dow Jones EURO STOXX 50 Index, a free-float market capitalizationweighted
index of 50 European blue-chip stocks from those countries participating in the EMU
[14].
The three indices from the Pacific Region matched to the Equity Asia Pacific active
mutual fund category were the Nikkei-225 Stock Average, a price-weighted average of 225 toprated
Japanese companies listed in the first section of the Tokyo Stock Exchange. The second
index was the Hang Seng Index, a free-float capitalization-weighted index of select companies
from the Hong Kong Stock Exchange. The final Pacific Region index used was the S&P/ASX
200 which measures the performance of the 200 largest index-eligible stocks listed on the ASX
by float-adjusted market capitalization [14].
Table 1 depicts the paired index relationships referenced above. The active index on the
left-hand side of the table maps to the passive index on the right-hand side of the table.
Table 1. Paired Index Relationships
Active Index Benchmark Index
1. Equity Europe Dow Jones EURO STOXX 50 Index
2. Equity Europe FTSE 100
3. Equity Europe DAX
4. Equity Asia Pacific Nikkei 225
5. Equity Asia Pacific Hang Seng
6. Equity Asia Pacific S&P/ASX
Data collection methods
Secondary data will be collected and analyzed from the Morningstar Direct database.
Daily data points will be extracted and used for each set of paired index comparisons. The daily
data points of paired indices were exported into the Microsoft Excel computer program
spreadsheet. The means, variances, and related risk-adjusted measures of each of the paired
indices were calculated, compared, and analyzed.
Research model and variables
Figure 1 shown in Appendix A presents the research model identified in Miller [64]. It
details the relationships among the variables and presents a general flow of the study’s logic and
potential outcomes. The independent variable was management style, passive versus active while
investment performance was the dependent variable.
Risk-adjusted returns were measured using the Sharpe composite performance measure, a
measure combining risk and return into a single value. The Sharpe ratio was used to compare the
passive and active fund performance [64]. The Sharpe ratio, also known as the reward-tovariability
ratio, was derived from the earlier work of Markowitz’s mean-variance model. The
Sharpe measure of portfolio performance, S, is stated as:
S = (R i –R FR ) / б i (4)
Where:
R i = the average portfolio return during a specified time period.
R FR = the average return of a risk-free investment during the same time.