The Relationship between Active Management Strategy and Fund Performance: Evidence from Equity Mutual Funds in Taiwan

This paper examines the relationship between active management strategy and fund performance by studying 814 foreign and domestic equity funds available for sale in Taiwan from 2006Q4 to 2015Q3. This paper uses Active Share and Tracking Error as measures of active management strategy introduced by Cremers and Petajisto (2009), while controlling for other fund characteristics such as expenses, size and holdings in the panel regression, we examine using funds’ alpha. Empirical results indicate a significant relationship between active management strategy and fund performance, where Active Share has positive effect and Tracking Error has negative effect on future performance. This paper also separate funds into five types according to levels of active management strategy, results show difference in fund performances between strategy types, which further imply that Active Share must be combined with other measures of active management.