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The relation between fees and return predictability in the mutual fund industry

Marta Vidal, Javier Vidal-García, Hooi Hooi Lean () and Gazi Uddin ()

Economic Modelling, 2015, vol. 47, issue C, 260-270

Abstract: We propose and test a methodological framework to examine the relation between mutual fund fees and return predictability. Gil-Bazo and Ruiz-Verdu (2009) drew attention to the puzzling fact that funds with worse before-fee performance charge higher fees. We make another contribution to the literature about the market for equity mutual funds: we find strong evidence of predictability for mutual fund fees. Funds with both positive and negative relations with fees show strong evidence of negative return predictability for their fees. Our findings are robust to alternative estimation methods and under the assumption of conditionally heteroskedastic stock returns. Our results also show that conditioning information (e.g. dividend yield, t-bill yield, default spread and term spread) are useful in selecting funds with superior performance and are valuable for asset allocation decisions.

Keywords: Mutual fund performance; Mutual fund fees; Return predictability; Investor's performance sensitivity (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:47:y:2015:i:c:p:260-270

DOI: 10.1016/j.econmod.2015.02.036

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