Measuring the True Cost of Active Management by Mutual Funds

Journal of Investment Management, Vol. 5, No. 1, First Quarter 2007

Posted: 28 Mar 2007

See all articles by Ross M. Miller

Ross M. Miller

Miller Risk Advisors; SUNY at Albany - School of Business

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Abstract

This article derives a rigorous method for allocating fund expenses between active and passive management and that enable one to compute the implicit cost of active management. Computing this "active expense ratio" requires only a fund's published expense ratio, its R-squared relative to a benchmark index, and the expense ratio for a competitive fund that tracks that index. This method is then applied to the Morningstar universe of large-cap mutual funds and active expense ratios are found to average more than 7%. The cost of active management for other classes of mutual funds is also found to substantial.

Keywords: Mutual fund expense ratios, active portfolio management, shadow indexing, mutual fund performance

Suggested Citation

Miller, Ross M., Measuring the True Cost of Active Management by Mutual Funds. Journal of Investment Management, Vol. 5, No. 1, First Quarter 2007. Available at SSRN: https://ssrn.com/abstract=972173

Ross M. Miller (Contact Author)

Miller Risk Advisors ( email )

2255 Algonquin Road
Niskayuna, NY 12309-4711
United States
518-346-0781 (Phone)

HOME PAGE: http://www.millerrisk.com

SUNY at Albany - School of Business

1400 Washington Ave.
Albany, NY 12222
United States

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