The Relation between Fees and Return Predictability in the Mutual Fund Industry

38 Pages Posted: 24 Nov 2013 Last revised: 26 Sep 2018

See all articles by Marta Vidal

Marta Vidal

Universidad Europea de Madrid; Universidad Complutense de Madrid (UCM)

Javier Vidal-García

Harvard University; Complutense University Madrid

Hooi Hooi Lean

Universiti Sains Malaysia

Gazi Salah Uddin

Linkoping University - Department of Management and Engineering Division

Date Written: February 1, 2015

Abstract

We propose and test a methodological framework to examine the relation between mutual fund fees and return predictability. Gil-Bazo and Ruiz-Verdu (2009) drew attention to the puzzling fact that funds with worse before-fee performance charge higher fees. We make another contribution to the literature about the market for equity mutual funds: we find strong evidence of predictability for mutual fund fees. Funds with both, a positive and a negative relation with fees show a strong evidence of negative return predictability for their fees. Our findings are robust to alternative estimation methods and under the assumption of conditionally heteroskedastic stock returns. Our results also show that conditioning information (e.g. dividend yield, t-bill yield, default spread and term spread) are useful in selecting funds with superior performance and valuable for asset allocation decisions.

Keywords: Mutual Fund Performance; Mutual Fund Fees; Return Predictability; Investor´s Performance

JEL Classification: G10, G11, G23

Suggested Citation

Vidal, Marta and Vidal-García, Javier and Lean, Hooi Hooi and Uddin, Gazi Salah, The Relation between Fees and Return Predictability in the Mutual Fund Industry (February 1, 2015). Economic Modelling. Volume 47, June 2015, p. 260-270. Available at SSRN: https://ssrn.com/abstract=2358917 or http://dx.doi.org/10.2139/ssrn.2358917

Marta Vidal

Universidad Europea de Madrid ( email )

Villaviciosa de Odón
Madrid, 28670
Spain

Universidad Complutense de Madrid (UCM) ( email )

Somosaguas Campus
Madrid, 28223
Spain

Javier Vidal-García (Contact Author)

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Complutense University Madrid ( email )

School of Business Administration
Somosaguas Campus
Madrid, Madrid 28223
Spain

Hooi Hooi Lean

Universiti Sains Malaysia ( email )

Economics Program
School of Social Sciences
USM, Penang 11800
Malaysia
604-6532663 (Phone)
604-6570918 (Fax)

HOME PAGE: http://www.soc.usm.my/LeanPages/index.html

Gazi Salah Uddin

Linkoping University - Department of Management and Engineering Division ( email )

Linköping, 581 83
Sweden

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