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Indexing and active fund management: International evidence

Author

Listed:
  • Cremers, Martijn
  • Ferreira, Miguel A.
  • Matos, Pedro
  • Starks, Laura

Abstract

We examine the relation between indexing and active management in the mutual fund industry worldwide. Explicit indexing and closet indexing by active funds are associated with countries’ regulatory and financial market environments. We find that actively managed funds are more active and charge lower fees when they face more competitive pressure from low-cost explicitly indexed funds. A quasi-natural experiment using the exogenous variation in indexed funds generated by the passage of pension laws supports a causal interpretation of the results. Moreover, the average alpha generated by active management is higher in countries with more explicit indexing and lower in countries with more closet indexing. Overall, our evidence suggests that explicit indexing improves competition in the mutual fund industry.

Suggested Citation

  • Cremers, Martijn & Ferreira, Miguel A. & Matos, Pedro & Starks, Laura, 2016. "Indexing and active fund management: International evidence," Journal of Financial Economics, Elsevier, vol. 120(3), pages 539-560.
  • Handle: RePEc:eee:jfinec:v:120:y:2016:i:3:p:539-560
    DOI: 10.1016/j.jfineco.2016.02.008
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    1. repec:bis:bisqtr:1803j is not listed on IDEAS
    2. repec:eee:inecon:v:108:y:2017:i:c:p:413-430 is not listed on IDEAS
    3. Raddatz, Claudio & Schmukler, Sergio L. & Williams, Tomás, 2017. "International asset allocations and capital flows: The benchmark effect," Journal of International Economics, Elsevier, vol. 108(C), pages 413-430.
    4. repec:eee:jfinec:v:126:y:2017:i:1:p:122-146 is not listed on IDEAS
    5. repec:eee:finmar:v:36:y:2017:i:c:p:17-39 is not listed on IDEAS
    6. Ferreira, Miguel & Massa, Massimo & Matos, Pedro Pinto, 2016. "Investor-Stock Decoupling in Mutual Funds," CEPR Discussion Papers 11476, C.E.P.R. Discussion Papers.
    7. repec:eee:ecmode:v:70:y:2018:i:c:p:29-39 is not listed on IDEAS
    8. Dahlquist, Magnus & Odegaard, Bernt Arne, 2018. "A Review of Norges Bank's Active Management of the Government Pension Fund Global," UiS Working Papers in Economics and Finance 2018/1, University of Stavanger.
    9. Cremers, Martijn & Pareek, Ankur, 2016. "Patient capital outperformance: The investment skill of high active share managers who trade infrequently," Journal of Financial Economics, Elsevier, vol. 122(2), pages 288-306.
    10. repec:eee:quaeco:v:65:y:2017:i:c:p:146-157 is not listed on IDEAS
    11. Harry Flam & Roine Vestman, 2017. "Swedish Equity Mutual Funds 1993-2013: Performance, Persistence and Presence of Skill," CESifo Working Paper Series 6713, CESifo Group Munich.
    12. repec:eee:jbfina:v:82:y:2017:i:c:p:133-150 is not listed on IDEAS
    13. Braun, Benjamin, 2016. "Gross, greed, and ETFs: The case for a microfounded political economy of the investment chain," economic sociology_the european electronic newsletter, Max Planck Institute for the Study of Societies, vol. 17(3), pages 6-13.
    14. repec:spr:annopr:v:267:y:2018:i:1:d:10.1007_s10479-017-2429-z is not listed on IDEAS
    15. Cheng, Si & Massa, Massimo & Zhang, Hong, 2017. "Inefficient Globalization of Finance: Evidence from Marketing-Oriented Overseas Expansions of Low-Skilled Mutual Fund Families," CEPR Discussion Papers 11990, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Mutual funds; Active management; Index funds; Exchange-traded funds; Competition; Fees; Performance;

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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