Yet Another Puzzle? The Relation between Price and Performance in the Mutual Fund Industry

Universidad Carlos III de Madrid Business Economics Working Paper No. 06-65

51 Pages Posted: 29 Nov 2006

See all articles by Pablo Ruiz-Verdú

Pablo Ruiz-Verdú

Universidad Carlos III de Madrid

Javier Gil-Bazo

Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

Date Written: March 1, 2007

Abstract

Gruber (1996) drew attention to the puzzle that investors buy actively-managed funds even though, on average, they under-perform index funds. We uncover another puzzling fact about the market for actively-managed equity mutual funds: funds with worse before-fee performance charge higher fees. We then conduct a series of robustness checks and find that the apparently anomalous fee-performance relation survives all of them. Finally, we show that this relation may be explained as the outcome of strategic fee setting by mutual funds in the presence of investors with different degrees of sensitivity to performance.

Keywords: Mutual fund performance, mutual fund fees, investors' performance sensitivity

JEL Classification: G11, G23, L1

Suggested Citation

Ruiz-Verdú, Pablo and Gil-Bazo, Javier, Yet Another Puzzle? The Relation between Price and Performance in the Mutual Fund Industry (March 1, 2007). Universidad Carlos III de Madrid Business Economics Working Paper No. 06-65. Available at SSRN: https://ssrn.com/abstract=947448 or http://dx.doi.org/10.2139/ssrn.947448

Pablo Ruiz-Verdú

Universidad Carlos III de Madrid ( email )

Calle Madrid 126
Getafe, Madrid 28903
Spain
+34 91 624 5801 (Phone)
+34 91 624 9607 (Fax)

Javier Gil-Bazo (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

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