The Relation Between Price and Performance in the Mutual Fund Industry

Posted: 15 Sep 2008

See all articles by Javier Gil-Bazo

Javier Gil-Bazo

Universitat Pompeu Fabra; UPF Barcelona School of Management; Barcelona School of Economics

Pablo Ruiz-Verdú

Universidad Carlos III de Madrid

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

Gil-Bazo, Javier and Ruiz-Verdú, Pablo, The Relation Between Price and Performance in the Mutual Fund Industry (September 12, 2008). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1267339

Javier Gil-Bazo (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

UPF Barcelona School of Management ( email )

Carrer de Balmes, 132, 134
Barcelona, 08008
Spain

Barcelona School of Economics ( email )

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

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)

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