The Review of Asset Pricing Studies Vol. 13 No. 2 2023

Cheaper Is Not Better: On the ‘Superior’ Performance of High-Fee Mutual Funds

Jinfei Sheng¹; Mikhail Simutin²; Terry Zhang³

¹ Merage School of Business, University of California , Irvine, USA · ² Rotman School of Management, University of Toronto , Canada · ³ College of Business and Economics, Australian National University , Australia

Abstract

In contrast with theoretical predictions, high-fee active equity funds generate worse net-of-expenses performance. We show that this fee-performance puzzle is driven by the preference of high-fee funds for stocks with low operating profitability and high investment rates, characteristics associated with low expected returns. After controlling for exposures to profitability and investment factors, we find high-fee funds significantly outperform low-fee funds before expenses and achieve similarly poor net-of-fees performance. In resolving the fee-performance puzzle, our findings provide support to the theoretical prediction that net alphas are unrelated to fees and challenge the common advice to prefer low-fee funds over high-fee counterparts.

DOI

10.1093/rapstu/raac019

Volume

13

Issue

2

Pages

375-404

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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