The effects of constraints on the performance of actively managed funds in relation to their benchmark indices

• Main Author: Eiselen, Linda Minette
• Other Authors: Ward, Mike
• Language: en
• Published: University of Pretoria 2018
• Subjects: UCTD; Actively-managed funds; Tracking errors; Weights; Constraints; Benchmark indices
• Online Access: http://hdl.handle.net/2263/66040; Eiselen, LM 2018, The effects of constraints on the performance of actively managed funds in relation to their benchmark indices, MBA Mini Dissertation, University of Pretoria, Pretoria, viewed yymmdd <http://hdl.handle.net/2263/66040>

Actively-managed funds have recently come under fire as it has been determined that they consistently underperform passive funds. Benchmarking, and the constraints placed on actively-managed funds, are standard practices within the industry, but research suggests that these constraints negatively affect fund performance. This research paper explores the effectiveness of actively-managed funds in relation to their benchmark indices, in terms of tracking errors and weighting constraints. This is done by qualifying the effect of these constraints on the performance of hypothetically constructed portfolios in relation to the FTSE / JSE Top 40 Index. The results are presented graphically and show that tracking error limits did, as expected, limit the possible upside returns of these funds. It was found however, that the tracking error constraints had a much greater effect on limiting downside risk than they had on limiting upside effects. Weighting limitations did not have a single universal effect on the simulated portfolios’ performance but affect performance in conjunction with tracking error limits. It was concluded that for the hypothetically constructed portfolios for the period studied, constraints did not affect the possible upside return to such a magnitude that the constraints themselves could account for the underperformance of actively managed funds and they had an overall positive effect on performance. === Mini Dissertation (MBA)--University of Pretoria, 2018. === Gordon Institute of Business Science (GIBS) === MBA === Unrestricted