World Economics - Insight , Analysis and Data

World Economics - Insight , Analysis and Data
Paying the High Price of Active Management
Ross M. Miller
World Economics, September 2010

Financial economists have long known that actively managed mutual funds underperform comparable index funds and that investment management fees are a major contributor to this underperformance. This article shows that the impact of mutual fund fees is even greater when one examines what funds actually do with investors’ money. Many actively managed mutual funds have returns that are closely correlated with comparable index funds and yet have annual fees that can be 100 times higher. Because such ‘shadow’ or ‘closet’ index funds provide minimal active management of the assets they hold, the implied annual cost of the active management can dwarf the stated cost. This article provides a simple measure of what investors are actually paying fund managers for that active management that they can compute for themselves data available for free on the Internet. A recent sample of 731 actively managed large-cap US mutual funds has an average active expense ratio of 6.44%, more than 400% greater than their average reported expense ratio of 1.20%. This article also finds that even large, seemingly low-cost, mutual funds common in retirement plans frequently have active expense ratios above 4% a year.
Download paper

Related thinking:
    Data on Singapore’s Sovereign Wealth Fund is Flawed
Christopher Balding
World Economics, September 2015
    Taking Stock of Microfinance
Antara Haldar & Joseph Stiglitz
World Economics, June 2015
    Quicksilver Markets
Theodore Berg
World Economics, June 2015




© Copyright World Economics Ltd. 2017