Cheaper is not better: On the Superior performance of high-fee mutual funds

Jinfei Sheng, Mikhail Simutin*, Terry Zhang

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    In contrast with theoretical predictions, high-fee active equity funds generate worse net-ofexpenses 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 feeperformance 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.

    Original languageEnglish
    Pages (from-to)375-404
    Number of pages30
    JournalReview of Asset Pricing Studies
    Volume13
    Issue number2
    DOIs
    Publication statusPublished - Jun 2023

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