Actively managed, but more index-like
Chicago Booth – Analyzing 2,789 actively managed mutual funds between 1979 and 2014, the researchers find that fund portfolios have become more liquid over time, largely as a result of becoming more diversified. Both components of diversification—balance and coverage—have risen sharply, especially since 2000. The level of coverage rose faster than the level of balance as mutual-fund managers poured ever more names into their portfolios.
The research captures the rise of closet indexing among active-mutual-fund managers, a phenomenon that may be caused by managers hewing toward the benchmark they are trying to outperform. While diversification has some benefits in terms of risk management and liquidity, the close resemblance of active portfolios to passive indexes might leave some investors wondering why they’re bothering to pay for active management given the ubiquitous availability of cheap, passive alternatives. more>