An evaluation of investor returns under active vs passive equity portfolio management strategies

Abstract

The study set out to evaluate investor returns under active vs. passive equity portfolio management strategies and to analyze which strategy offered the highest risk adjusted returns. Returns were evaluated by calculating returns of investing in a market index, for a passive strategy, and calculating returns of investing via a fund manager for an active strategy. These returns were then compared using graphs, charts and tables Portfolio performance analysis was then carried out using coefficient of variation that measures relative dispersion and Sharpe ratio that measures mean excess returns per unit of risk. The study covered the period from 1st January 2003 to 31st December 2006. The funds under consideration in this research were British American Equity Fund, Old Mutual Equity Fund, African Alliance Managed Fund and Commercial Bank of Africa Equity Fund. The stock market indices under consideration in this study were the NSE 20 share market index and the AIG (EA) 27 share market index. The study entailed a census of all Fund managers with equity funds that are authorized to operate as fund managers in Kenya by the CMA. Extensive library research was used to collect data for the purpose of this study. This entailed contacting both fund managers, AIG (EA) and the Nairobi Stock Exchange to collect data relevant for this research. The research findings showed that with regards to mean excess returns per unit of risk as computed using the Sharpe ratio, the market indices returns ranked higher than the fund managers and with regards to relative dispersion as computed using coefficient of variation, with the exception of British American Equity Fund, the fund managers ranked higher than the market indices. This therefore implies that market indices generated higher risk adjusted returns than fund managers and hence, the passive strategy of indexing offered better returns than the active fund managers.