Cheaper Is Not Better: On the ‘Superior’ Performance of High-Fee Mutual Funds

46 Pages Posted: 9 Feb 2017 Last revised: 2 Sep 2021

See all articles by Jinfei Sheng

Jinfei Sheng

University of California, Irvine - Paul Merage School of Business

Mikhail Simutin

University of Toronto - Rotman School of Management

Terry Zhang

Australian National University (ANU)

Date Written: September 1, 2021

Abstract

In contrast with theoretical predictions, high-fee active equity funds generate worse net-of-expenses performance. We show that this fee-performance puzzle is driven by the preference of high-fee funds for stocks with low operating profitability and high investment rates, characteristics associated with low expected returns. After controlling for exposures to profitability and investment factors, high-fee funds significantly outperform low-fee funds before expenses and achieve similarly poor net-of-fees performance. In resolving the fee-performance puzzle, our findings provide support to the theoretical prediction that skilled managers extract rents by charging high fees, and challenge the common advice to prefer low-fee funds over high-fee counterparts.

Keywords: Mutual fund performance, fee-performance relation, factor models, valuation cost

JEL Classification: G23, G11, J24

Suggested Citation

Sheng, Jinfei and Simutin, Mikhail and Zhang, Terry, Cheaper Is Not Better: On the ‘Superior’ Performance of High-Fee Mutual Funds (September 1, 2021). Rotman School of Management Working Paper No. 2912511, Available at SSRN: https://ssrn.com/abstract=2912511 or http://dx.doi.org/10.2139/ssrn.2912511

Jinfei Sheng

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA 92697
United States

HOME PAGE: http://sites.google.com/site/shengjinfei/

Mikhail Simutin (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/simutin

Terry Zhang

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

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