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

46 Pages Posted: 9 Feb 2017 Last revised: 13 Oct 2020

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: October 12, 2020

Abstract

In contrast with theoretical predictions, after-fee performance of actively managed equity mutual funds is known to decline with expense ratios. We show that this relation is entirely 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 perform similarly after expenses. Our results have important implications for asset allocation decisions and support the theoretical prediction that skilled managers extract rents by charging high fees.

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 (October 12, 2020). 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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