Week 2 - Assignment

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Week 2 Assignment-Ethics in Financial Services Maruthi Nallapati Forbes School of Business and Technology FIN 680 Marcus Crawford 26/9/2023 1

Active versus Passive Management Return Performance Description 1 Year 3 Year 5 Year 10 Year Voya Large-Cap Growth Fund Class I (PLCIX) 18.13% 4.84% 9.97% 12.87 % S&P 500 TR USD2Benchmark 19.44% 11.28 % 10.16 % 11.97 % Northern Income Equity Fund NOIEX (JICAX1) 17.60% 9.39% 8.92% 10.87 % S&P 500 TR USD2Benchmark 19.44% 11.28 % 10.16 % 11.97 % MFS Blended Research Value Equity Fund Class A (BRUDX) 21.89% 12.06 % 10.72 % 12.30 % S&P 500 TR USD2Benchmark 19.44% 11.28 % 10.16 % 11.97 % American Funds American Mutual Fund® Class F- 1 (AMFFX) 16.20% 12.15 % 8.80% 10.42 % S&P 500 TR USD2Benchmark 19.44% 11.28 % 10.16 % 11.97 % Northern Income Equity Fund NOIEX (NOIEX1) 6.80% 9.27% 7.85% 9.69% S&P 500 TR USD2Benchmark 19.44% 11.28 % 10.16 % 11.97 % Return Performance of Actively Managed Funds The Voya Large-Cap Growth Fund Class I (PLCIX) has underperformed the S&P 500 TR USD2 benchmark in all time periods analyzed (1 year, 3 years, 5 years, and 10 years). This means that the fund has generated lower returns for investors compared to the benchmark. Over the past year, the fund has returned 18.13%, slightly lower than the benchmark's return of 19.44%. Over the longer term, the fund's 3-year and 5-year returns have also been lower than the benchmark's, indicating that the fund has not been able to keep up with the 2

market's performance over that time period. However, over a 10-year period, the fund's returns have been slightly higher than the benchmark's, suggesting that the fund's active management may have led to some outperformance over a longer time horizon. The return performance of the Northern Income Equity Fund (NOIEX or JICAX1) over the past 1, 3, 5, and 10 years has been 17.60%, 9.39%, 8.92%, and 10.87%, respectively. This means that the fund has had positive returns for each of these time periods. However, compared to the benchmark index, the S&P 500 TR USD, the fund has underperformed in terms of annual returns. The S&P 500 TR USD benchmark has had returns of 19.44%, 11.28%, 10.16%, and 11.97% over the same time periods. This underperformance suggests that the actively managed fund has not been able to outperform the overall market as measured by the benchmark index. The fund may have not been able to generate as high returns due to a number of factors, such as higher expenses, lower diversification, or a less successful investment strategy. Additionally, the fund may have also experienced lower returns due to its focus on income-producing securities, which may not have seen as much growth as other sectors in the market. The above actively managed fund, MFS Blended Research Value Equity Fund Class A, has shown a consistent outperformance against its benchmark, the S&P 500 TR USD2, over the past 1, 3, 5, and 10 year periods. In the 1-year time frame, the fund has returned 21.89%, outpacing the index's return of 19.44% by 2.45%. This could be attributed to the fund's active management approach, where the fund managers have the flexibility to select stocks that they believe are undervalued and have the potential for growth, thus leading to higher returns. Over the 3-year and 5-year time frames, the actively managed fund has also outperformed the index by 0.78% and 0.56% respectively. This further demonstrates the success of the fund managers' 3

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investment strategy and their ability to generate alpha (excess returns) for investors. Even over the long-term period of 10 years, the actively managed fund has outperformed the index by 0.33%. This suggests that the fund managers have been able to consistently identify undervalued stocks and generate superior returns for investors over the past decade. The return performance of the American Funds American Mutual Fund® Class F-1 (AMFFX) was lower than the S&P 500 TR USD2 benchmark in the 1 year, 3 year, and 5 year time periods, but higher in the 10 year time period. This suggests that the fund may have underperformed in the short term, but has shown better performance over a longer period of time. This could be due to the investment strategy of the fund, which may focus on long-term growth rather than short-term gains. Additionally, the fund is actively managed, which means that a team of managers makes investment decisions and actively trades securities in an attempt to outperform the market. This can result in higher fees and expenses for the fund, which may contribute to its lower return performance compared to the index. However, it is worth noting that the AMFFX fund still had positive returns in all time periods and showed stronger performance in the 10 year period, indicating the potential benefits of active management over a longer time horizon. The Northern Income Equity Fund (NOIEX) underperformed its benchmark, the S&P 500 TR USD, in all time periods shown. This means that the fund was not able to achieve the same level of return as the overall market represented by the index. However, it is worth noting that the fund still posted positive returns in all time periods, indicating some level of success in its investment strategy. In the one-year period, NOIEX returned 6.80% compared to the benchmark's 19.44%. This underperformance can be attributed to market conditions, as the S&P 500 experienced a significant rally in this time period. However, over the longer-term periods of 4

three, five, and ten years, NOIEX still underperformed the benchmark, suggesting that the fund may not have been able to keep up with the overall market performance. It is also worth noting that NOIEX is an income fund, which means it may have a different investment strategy compared to the overall market. Income funds typically focus on generating income for investors through dividends, which may result in lower returns compared to growth-oriented funds. Consistent Generation of Alpha by Chosen Funds Out of the five funds chosen, only one consistently generated alpha, which is the MFS Blended Research Value Equity Fund Class a (BRUDX). This means that the fund has consistently outperformed its benchmark, the S&P 500 TR USD2, over the past 1, 3, 5, and 10 year time periods. This suggests that the fund managers have been able to select undervalued stocks and generate positive returns for investors. The other four funds, including Voya Large-Cap Growth Fund Class I (PLCIX), Northern Income Equity Fund NOIEX (JICAX1), American Funds American Mutual Fund® Class F-1 (AMFFX), and Northern Income Equity Fund NOIEX (NOIEX1), have not consistently generated alpha. While some funds may have outperformed their benchmark in certain time periods, they have also underperformed in others. This suggests that the funds may have had some successful periods, but could not consistently beat the market. It is also worth noting that only one of the five funds, American Funds American Mutual Fund® Class F-1 (AMFFX), showed consistent positive returns in all time periods analyzed. The other four funds all had positive returns in the 1-year time frame, but experienced negative 5

returns in one or more of the longer-term time periods. This suggests that the returns of these funds may be volatile and not consistently positive. Pros and Cons of Active Management for an Equity Portfolio Pros: 1. Potential for higher returns: The primary goal of active management is to outperform the market, also known as generating alpha. This means that with successful stock selection and market timing, actively managed funds have the potential to generate higher returns for investors. 2. Flexibility in investment decisions: Actively managed funds have the flexibility to buy and sell investments based on market trends and the fund manager's investment strategy. This allows for more nimble decision-making and the ability to take advantage of market opportunities. 3. Personalized approach: With active management, investors typically have access to a team of professional fund managers who can provide personalized investment advice and actively manage their portfolio according to their goals, risk tolerance, and time horizon. Cons: 1. Higher fees and expenses: Actively managed funds typically charge higher fees and expenses compared to passively managed funds. These fees can eat into investors' returns and potentially limit the fund's overall performance. 6

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2. Increased risk: Because fund managers actively make investment decisions and may take on higher-risk investments in pursuit of outperformance, actively managed funds can be riskier than passively managed funds. This can result in higher returns, but also greater potential losses. 3. No guarantee of performance: While active management aims to outperform the market, there is no guarantee that fund managers will be successful in achieving this goal. In fact, research has shown that the majority of actively managed funds underperform their respective benchmarks over the long term. 4. Limited diversification: Some actively managed funds may have a concentrated portfolio, meaning they hold a smaller number of stocks compared to passively managed funds. This lack of diversification can increase the overall risk of the portfolio. Pros and Cons of Passive Management for an Equity Portfolio Pros: 1. Lower fees: Passive management typically involves investing in index funds or ETFs, which have lower fees and expenses compared to actively managed funds. This means investors can keep more of their returns. 2. Broad market exposure: Passive management involves investing in a broad index or market, such as the S&P 500, which provides exposure to a wide range of companies. This can help reduce risk and provide diversification for investors. 7

3. Consistent returns: Unlike actively managed funds, passive funds aim to replicate the performance of their benchmark index. This means that investors can expect consistent returns, without the risk of the fund underperforming. 4. Easy to understand: Index funds and ETFs are relatively straightforward investments, making them easy for investors to understand and track. This can make passive management a good option for beginner investors or those who prefer a hands-off approach. Cons: 1. Lack of flexibility: Passive management means following the performance of a specific benchmark, which limits the fund manager's ability to make changes based on market trends or their own investment strategy. 2. Limited potential for outperformance: By design, passive funds aim to match the performance of their benchmark index, so they do not have the potential to outperform the market. This means that investors may miss out on opportunities for higher returns. 3. No personalized approach: Unlike actively managed funds, passive funds do not offer personalized investment advice or strategy. They simply aim to replicate the performance of the index they track. 4. Unable to avoid overvalued stocks: Passive funds hold all or a large number of stocks in their chosen index, even if some of those stocks are overvalued. This means that investors are exposed to the potential risks of overvalued stocks. 8

References Tamplin, T. (2023). Active Management | Definition, Benefits, Drawbacks, Strategies. Finance Strategists. https://www.financestrategists.com/wealth-management/investment- management/active-management/#:~:text=Active%20management%20has%20benefits%2C %20such,the%20risk%20of%20human%20error. Nason, D. (2016, December 13). Weighing the pros and cons of active portfolio management. CNBC. https://www.cnbc.com/2016/12/12/weighing-the-pros-and-cons-of-active-portfolio- management.html BRI Wealth Management. (2021, February 24). The pros and cons of active and passive Investments - BRI Wealth Management. https://brigroup.co.uk/the-pros-and-cons-of-active-and- passive-investments/ Snelling, D. (2020, November 3). Investment funds – 12 pros and cons of active and passive funds - Charlton House. Charlton House. https://charltonhousewealthmanagement.hk/investment-funds-12-pros-and-cons-of-active-and- passive-funds/ 9

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