Cheaper is Not Better: On the Superior Performance of High-Fee Mutual Funds

42 Pages Posted: 9 Feb 2017 Last revised: 6 Sep 2019

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, 2019

Abstract

The well-established inverse relation between fees and net-of-fee performance of active mutual funds guides portfolio decisions of many investors. We find that this relation is an artifact of the failure to adjust performance for exposures to profitability and investment factors. High-fee funds specialize in stocks with low operating profitability and high investment rates. We show that after controlling for exposures to profitability and investment factors, high-fee funds significantly outperform low-fee funds before expenses and perform similarly after expenses. Our results have important implications for household finance and support the theoretical prediction that skilled managers extract rents by charging high fees.

Keywords: Mutual fund performance, expenses, fee-performance relation, factor models

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, 2019). 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 Dr
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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