Cheaper Is Not Better: On the ‘Superior’ Performance of High-Fee Mutual Funds
49 Pages Posted: 9 Feb 2017 Last revised: 13 Jun 2022
Date Written: May 21, 2022
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 net alphas are unrelated to 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: Suggested Citation