Investors’ Expectations, Management Fees and the Underperformance of Mutual Funds

Andreas D. Huesler, Yannick Malevergne and Didier Sornette
Additional contact information
Andreas D. Huesler: ETH Zürich
Didier Sornette: Swiss Finance Institute and ETH Zürich

No 12-01, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Why do investors keep buying underperforming mutual funds? To address this issue, we develop a one-period principal-agent model with a representative investor and a fund manager in an asymmetric information framework. This model shows that the investor’s perception of the fund plays the key role in the fund’s fee-setting mechanism. Using a simple relation between fees and funds’ performance, empirical evidence suggests that most US domestic equity mutual funds have added high markups during the period from July 2003 to March 2007. For these fees to be justified, we show that the investor would have expected the fund manager to deliver an overall annual net excess-return of around 1.5% the S&P 500 on a risk adjusted basis. In addition, our model offers a new classification of funds, based on their ability to provide benefits to investors’ portfolios.

Keywords: Mutual Fund Fee; Mutual Fund; Asymmetric Information; Principal-Agent Relationship; Markup (search for similar items in EconPapers)
JEL-codes: D82 G11 G23 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2012-02
New Economics Papers: this item is included in nep-fmk
References: Add references at CitEc
Citations:

Downloads: (external link)
http://ssrn.com/abstract=1998823 (application/pdf)

Related works:
Working Paper: Investors' expectations, management fees and the underperformance of mutual funds (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1201

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().