The Relation between Price and Performance in the Mutual Fund Industry Articles uri icon

publication date

  • October 2009

start page

  • 2153

end page

  • 2183


  • 5


  • 64

International Standard Serial Number (ISSN)

  • 0022-1082

Electronic International Standard Serial Number (EISSN)

  • 1540-6261


  • Gruber (1996) drew attention to the puzzle that investors buy actively managed equity mutual funds, even though on average such funds underperform index funds. We uncover another puzzling fact about the market for equity mutual funds: Funds
    with worse before-fee performance charge higher fees. This negative relation
    between fees and performance is robust and can be explained as the outcome of
    strategic fee-setting by mutual funds in the presence of investors with
    different degrees of sensitivity to performance. We also find some evidence that
    better fund governance may bring fees more in line with performance. Copyright
    (c) 2009 the American Finance Association.