The Relation Between Price and Performance in the Mutual Fund Industry
Posted: 15 Sep 2008
Date Written: September 12, 2008
Abstract
Gruber (1996) drew attention to the puzzle that investors buy actively managed equity mutual funds, even though on average, such funds underperform index funds. We uncover another puzzling fact about the market for equity mutual funds: Funds with worse before-fee performance charge higher fees. This negative relation between fees and performance is robust and can be explained as the outcome of strategic fee-setting by mutual funds in the presence of investors with different degrees of sensitivity to performance. We also find some evidence that better fund governance may bring fees more in line with performance.
Keywords: mutual fund performance, mutual fund fees, investors' performance sensitivity, fund governance
JEL Classification: G23, G28, G30
Suggested Citation: Suggested Citation