Abstract

http://ssrn.com/abstract=1998823
 


 



Investors’ Expectations, Management Fees and the Underperformance of Mutual Funds


Andreas D. Huesler


ETH Zürich

Yannick Malevergne


University of Saint Etienne - Graduate School of Economics and Business Administration (ISEAG); EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Didier Sornette


Swiss Finance Institute; ETH Zurich

February 3, 2012

Swiss Finance Institute Research Paper No. 12-01

Abstract:     
Why do investors keep buying underperforming mutual funds? To address this issue, we develop a one-period principal-agent model with a representative investor and a fund manager in an asymmetric information framework. This model shows that the investor’s perception of the fund plays the key role in the fund’s fee-setting mechanism. Using a simple relation between fees and funds’ performance, empirical evidence suggests that most US domestic equity mutual funds have added high markups during the period from July 2003 to March 2007. For these fees to be justified, we show that the investor would have expected the fund manager to deliver an overall annual net excess-return of around 1.5% the S&P 500 on a risk adjusted basis. In addition, our model offers a new classification of funds, based on their ability to provide benefits to investors’ portfolios.

Number of Pages in PDF File: 60

Keywords: Mutual Fund Fee, Mutual Fund, Asymmetric Information, Principal-Agent Relationship, Markup

JEL Classification: G23, G11, D82

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Date posted: February 6, 2012  

Suggested Citation

Huesler, Andreas D. and Malevergne, Yannick and Sornette, Didier, Investors’ Expectations, Management Fees and the Underperformance of Mutual Funds (February 3, 2012). Swiss Finance Institute Research Paper No. 12-01. Available at SSRN: http://ssrn.com/abstract=1998823 or http://dx.doi.org/10.2139/ssrn.1998823

Contact Information

Andreas D. Huesler
Swiss Federal Institute of Technology Zurich ( email )
Zürichbergstrasse 18
8092 Zurich, CH-1015
Switzerland
Yannick Malevergne
University of Saint Etienne - Graduate School of Economics and Business Administration (ISEAG) ( email )
2, Rue Tréfilerie
F-42023 St. Etienne Cedex 2
France
EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )
23 av. Guy de Collongue BP 174
69132 Ecully Cedex
France
HOME PAGE: http://www.em-lyon.com/english/faculty/professors/efc/malevergne/index.aspx
Didier Sornette (Contact Author)
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland
ETH Zurich ( email )
Department of Management, Technology and Economics
Scheuchzerstrasse 7
8092 Zurich
Switzerland
41446328917 (Phone)
41446321914 (Fax)
HOME PAGE: http://www.er.ethz.ch/
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