1. 1 XVI. Another Puzzle: The Growth In Actively Managed Mutual Funds

2. 2 THE PERFORMANCE OF PUBLICLY OFFERED COMMODITY FUNDS Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Financial Analysts Journal, July-August 1990. NEW PUBLIC OFFERINGS, INFORMATION, AND INVESTOR RATIONALITY: THE CASE OF PUBLICLY OFFERED COMMODITY FUNDS Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Journal of Business, 1989. PROFESSIONALLY MANAGED PUBLICLY TRADED COMMODITY FUNDS Edwin J. Elton, Martin J. Gruber and Joel C. Rentzler, Journal of Business, April 1987.

3. 3 EFFICIENCY WITH COSTLY INFORMATION: A REINTERPRETATION OF EVIDENCE FROM MANAGED PORTFOLIOS Edwin J. Elton, Martin J. Gruber, Sanjiv Das, and Matthew Hlavka, The Review of Financial Studies, 1993. THE PERFORMANCE OF BOND MUTUAL FUNDS Christopher R. Blake, Edwin J. Elton, and Martin J. Gruber, Journal of Business, July 1993. FUNDAMENTAL ECONOMIC VARIABLES, EXPECTED RETURNS, AND BOND FUND PERFORMANCE Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake, Journal of Finance, September 1995. SURVIVORSHIP BIAS AND MUTUAL FUND PERFORMANCE Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake, The Review of Financial Studies, 1996. THE PERSISTENCE OF RISK-ADJUSTED MUTUAL FUND PERFORMANCE Edwin J. Elton, Martin J. Gruber, and Christopher R. Blake, Journal of Business, April 1996. ANOTHER PUZZLE: THE GROWTH IN ACTIVELY MANAGED MUTUAL FUNDS Martin J. Gruber, Journal of Finance, July 1996

4. 4 AVERAGE PERFORMANCE INDEX FUNDS CLOSED END FUNDS THE PERSISTENCE OF PFORMANCE EXPENSES WHAT ACCOUNTS FOR CASH FLOWS HOW WELL DO INVESTORS DO

5. 5

6. 6

7. 7

8. 8

9. 9 Customer Services – Including Record Keeping, The Ability To Move Money Around Among Funds, and Daily Valuation Low Transaction Costs Low Cost Diversification Professional Management (Security Selection)

10. 10 OPEN END MUTUAL FUNDS SELL AT NET ASSET VALUE. IF “GOOD MANAGEMENT” EXISTS, A FUND WHICH HAS SUPERIOR MANAGEMENT WILL SELL AT NET ASSET VALUE. IF BAD MANAGEMENT EXISTS, A FUND WHICH HAS INFERIOR MANAGEMENT WILL SELL AT NET ASSET VALUE. MANAGEMENT IS NOT PRICED.

11. 11

12. 12

13. 13

14. 14 INDEX FUNDS 19853 S&P FUNDS1.24% 1 SMALL STOCK0.88% NO GROWTH, VALUE, OR BOND FUND 1994 OVER 100 INDEX FUNDS 44 S&P FUNDS0.19% TO 1.35% GOOD TRACKING (R 2 =.997) LOW COST

15. 15

16. 16

17. 17

18. 18

19. 19

20. 20

21. 21

22. 22

23. 23

24. 24

25. 25

26. 26

27. 27 A.A SOPHISTICATED CLIENTELE B.A DISADVANTAGED CLIENTELE 1.UNSOPHISTICATED INVESTORS 2.INSTITUTIONALLY DISADVANTAGED INVESTORS 3.TAX DISADVANTAGED INVESTORS

28. 28 Taxes and the Advantage of Passive Management Active management turns over portfolios about once a year Passive management buys and holds Passive management gets to compound returns on before capital gains taxes value If taxes are high enough and horizon long enough, then passive management is better than active management with reasonable estimates of alpha

29. 29 Model of Horizon Values – Assumptions Tax on dividends paid once a year For active funds tax on capital gains paid once a year For passive funds tax on capital gains paid at horizon Investor reinvests all funds net of taxes end year where V 0 = starting investment at time 0, IV N = end of horizon after tax wealth if invested in index funds, AV N = end of horizon after tax wealth from active management, R M = return on the market including dividends, R E = the expense ratio for index funds, R D = dividend yield, R A = extra return from active management, T I = tax on dividends, T CG = tax on capital gains, N= number of years in investment horizon

30. 30 Index Funds where Active Management

31. 31

32. 32