How much should the active manager outperform the index

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Problem 1: A Taiwanese pension fund wants to invest TWD 1 billion in U.S. equity. Its board of trustees must decide whether to invest in a commingled index fund tracking the S&P index or give the money to an active manager. The board learns that this active manager turns the portfolios over about twice a year. Given the size of the account, the overall transaction costs are likely to be an average of 0.75% of each transaction's value. The active manager charges 0.5% in annual management fees, and the indexer charges 0.15%. By how much should the active manager outperform the index to cover the extra costs in the form of fees and transaction costs on the annual turnover?

Reference no: EM132983180

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