Do Fees Matter? Investor's Sensitivity to Active Management Fees

Abstract

The active mutual fund equilibrium model developed by Berk and Green (2004) predicts that fees should not matter for investors’ mutual fund choices. We examine how fees influence demand for active mutual funds by analyzing time variation in funds’ fees. Since investors should not pay "alpha fees" for "beta performance", we measure fees as an excess fee above the passive alternative and as the unit price of active management where active share represents the activity level. Using international data, we identify a negative time-series relation between fee measures and fund flows. The results also hold after controlling for Morningstar ratings.

Keywords: Mutual funds, active portfolio management, fund flows

JEL Classification: G11, G23, D14