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Performance and Characteristics of Actively Managed Retail Mutual Funds with Diverse Expense Ratios


John A. Haslem


University of Maryland - Robert H. Smith School of Business

H. Kent Baker


American University - Kogod School of Business

David M. Smith


State University of New York at Albany - School of Business

July 5, 2008

Financial Services Review, Vol. 17, No. 1, pp. 49-68, Spring 2008

Abstract:     
In this study, we provide extensive evidence on the performance and characteristics of 1,779 U.S. domestic, actively managed retail equity mutual funds. We find that expense ratios differ widely among Morningstar categories. Overall, our results indicate that funds with low expense ratios outperform those with higher expense ratios. An implication of these findings is that retail investors generally could gain insight into fund expenses and performance prospects relative to peers if research services such as Morningstar, Lipper, and Value Line included each fund's expense ratio standard deviation class in their basic suite of data items.

Consistent with previous studies, we find strong evidence that the average actively managed mutual fund fails to outperform its benchmark after expenses. Furthermore, the probability of a fund achieving a positive risk-adjusted return increases as its expense ratio decreases. Similar findings in the past have lead many experts to conclude that investors would be better off in low-cost passively managed index funds. Our results show that expenses must be at least one and perhaps two standard deviations below the peer-group mean for investors to have close to a 50-50 chance of beating a relevant benchmark.

We also examine mutual fund characteristics partitioned by expense ratio class. Compared with funds in high and very high expense ratio classes, our major results show that those in low or very low expense ratio classes have significantly lower front-end and deferred loads, 12b-1 fees, management fees, and turnover. An implication of this evidence is that expense conscious investors should look carefully at these fund characteristics before investing.

Our study provides evidence that supports links between mutual fund performance and fund attributes. Based on our regression analysis, we find evidence suggesting that larger equity funds tend to outperform smaller equity funds, which may reflect economies of scale. We find a significant negative relation between performance and loads (especially front-end loads), turnover, and beta (specifically using three-year performance measures). In addition, our results indicate no significant relation between performance and 12b-1 fees. We find evidence of statistically significant but mixed performance results for beta, cash, and dividend yields. In general, investors should be aware of these relations before investing.

Number of Pages in PDF File: 20

Keywords: mutual funds, retail actively managed funds, expense ratios, performance, expense ratio class, characteristics, larger vs. smaller funds

JEL Classification: G2, G23, G28

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Date posted: July 8, 2008 ; Last revised: September 30, 2012

Suggested Citation

Haslem, John A. and Baker, H. Kent and Smith, David M., Performance and Characteristics of Actively Managed Retail Mutual Funds with Diverse Expense Ratios (July 5, 2008). Financial Services Review, Vol. 17, No. 1, pp. 49-68, Spring 2008. Available at SSRN: http://ssrn.com/abstract=1155776

Contact Information

John A. Haslem (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
College Park, MD 20742
United States
202-236-3172 (Phone)
H. Kent Baker
American University - Kogod School of Business ( email )
4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202-885-1949 (Phone)
202-885-1992 (Fax)
David McNeil Smith
State University of New York at Albany - School of Business ( email )
1400 Washington Ave.
Albany, NY 12222
United States
HOME PAGE: http://www.albany.edu/ciim
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