 Investors' expectations, management fees and the underperformance of mutual fundsAndreas Huesler,
Yannick Malevergne and
Didier Sornette
Post-Print from HAL Abstract: Why do investors buy 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 a 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% above the S&P500 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: fund fee; management fees; asymmetric information; markup; investor expectations; fund underperformance; principal-agent relationship; mutual funds; fund performance; fund classification (search for similar items in EconPapers) Published in International Journal of Portfolio Analysis and Management, 2014, 1 (4), pp.345-379 P There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-02313203 Access Statistics for this paper More papers in Post-Print from HAL |
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