Paying the High Price of Active Management
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 investorsâ€™ 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 â€˜shadowâ€™ or â€˜closetâ€™ 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.
Volume (Year): 11 (2010)
Issue (Month): 3 (July)
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