Do mutual fund managers earn their fees? New measures for performance appraisal

This paper proposes a methodology to assess whether a mutual fund (MF) manages its costs and expenses efficiently, relative to its peers, in generating returns to investors. We consider incurred costs and expenses as MF disbursements. We develop a network data envelopment analysis model to assess MF performance from disbursement management perspective and propose new measures of MF performance - disbursement efficiency and disbursement utilization. We do this by conceptualising overall MF management process as a two-stage production process. In a sample of 1,706 U.S. equity MFs, we find that disbursement management performance relative to their peers (disbursement efficiency) is generally poor. Less than one per cent of the MFs are disbursement efficient and they are more likely to be growth funds. MFs that charge high fees perform relatively poorly in disbursement management. Large funds, on average, outperform mid-size and small funds in technical efficiency. According to our modelling framework, technical efficiency does not imply disbursement efficiency. Approximately fifteen per cent of technical efficient MFs are disbursement efficient. This is an indication that MF disbursement inefficiency is an issue that require attention of all stakeholders. Disbursement under-utilization and technical inefficiency explain disbursement inefficiency. For disbursement inefficient MFs, we provide pathways to become efficient in disbursement management. We validate the proposed MF performance measures empirically.