Yet another puzzle? the relation between price and performance in the mutual fund industry

Javier Gil-Bazo and Pablo Ruiz-Verdú

DEE - Working Papers. Business Economics. WB from Universidad Carlos III de Madrid. Departamento de Economía de la Empresa

Abstract: Gruber (1996) drew attention to the puzzle that investors buy actively-managed funds even though, on average, they underperform index funds. We uncover another puzzling fact about the market for actively-managed equity mutual funds: funds with worse before-fee performance charge higher fees. We then conduct a series of robustness checks and find that the apparently anomalous fee-performance relation survives all of them. Finally, we show that this relation may be explained as the outcome of strategic fee setting by mutual funds in the presence of investors with different degrees of sensitivity to performance.

Date: 2006-11
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