Does active management work?

Abstract

This study presents considerable evidence that equity sector mutual funds, the nine Fidelity Select Portfolios here, have provided better after-expense returns against broader market ETF, SPY, and their peer sector ETFs, the nine Select Sector SPDR Funds, over the sample period 1999–2010. Not only do they achieve higher nominal returns over the 12 years, except for few sector mutual funds, some of the funds also generate higher risk-adjusted returns measured by Sharpe Ratio and ! from various asset pricing models. More important, none of the sector mutual funds generates a significant negative ! for the sample period no matter that asset pricing model is used. The results suggest that actively managed sector funds be considered by individual investors and/or their financial planners for mutual fund selection.