Another Puzzle: The Growth in Actively Managed Mutual Funds

Gruber, Martin J.

doi:10.2307/2329222

Cited by 613 publications

(692 citation statements)

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“…There is scant evidence that more expensive funds pick securities well enough to offset their higher fees (e.g. Carhart, 1997; Gruber, 1996). Hence, it is puzzling that competition has not eliminated high-fee funds.…”

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confidence: 99%

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds

Choi

Laibson

Madrian

2009

The Review of Financial Studies

425

228

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We conduct an experiment to evaluate why individuals invest in high-fee index funds. In our experiments, subjects allocate $10,000 across four S&P 500 index funds and are rewarded for their portfolio’s subsequent return. Subjects overwhelmingly fail to minimize fees. We can reject the hypothesis that subjects buy high-fee index funds because of bundled non-portfolio services. Search costs for fees matter, but even when we eliminate these costs, fees are not minimized. Instead, subjects place high weight on annualized returns since inception. Fees paid decrease with financial literacy. Interestingly, subjects who choose high-fee funds sense they are making a mistake.

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confidence: 99%

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds

Choi

Laibson

Madrian

2009

The Review of Financial Studies

425

228

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“…15 Prior literature has found significant evidence that the best recent performing mutual funds receive the highest level of investor inflows (Ippolito 1992;Grinblatt and Titman 1992;Hendricks et al 1993;Sirri and Tufano 1998). Mutual fund investor flows are also persistent (Grinblatt and Titman 1992;Gruber 1996). However, other factors can influence investor flows.…”

Section: Literature Reviewmentioning

confidence: 99%

Tax Equalization in Mutual Funds

Gill¹

2011

Journal of the American Taxation Association

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By making an annual tax election, open-ended mutual funds can treat redeeming shareholders as if they have been allocated a pro-rata share of taxable gains, when in fact they have not (known as ''equalization''). Equalization provides significant benefits to shareholders and funds; however, it also leads to additional fund-level costs.In this study, we use equalization elections to examine how managers weigh the costs and benefits of tax minimization. Overall, our results suggest both are important in the decision-making process. Even though funds and investors both benefit, only 10 percent of funds use equalization. Funds in larger fund families and with higher expense ratios, both proxies for the additional infrastructure necessary to calculate equalization dividends, are more likely to use equalization. Equalization is also used when its benefits are highest, such as by funds with greater redemptions and larger unrealized gains.

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“…Mutual fund compensation is at best indirectly tied to performance. A number of studies suggest a positive correlation between ex post performance and net new money inflows (e.g., Capon et al [1996]; Carhart [1997]; Chevalier and Ellison [1997]; Goetzmann and Peles [1997]; Gruber [1996]; Sirri and Tufano [1998]; Najand and Prather [1999]). …”

Section: Performance Fees and The Role Of Indexesmentioning

confidence: 99%

A Thought or Two for Mutual Funds

Muhtaseb¹

2006

JOI

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Another Puzzle: The Growth in Actively Managed Mutual Funds

Cited by 613 publications

References 0 publications

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds

Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds

Tax Equalization in Mutual Funds

A Thought or Two for Mutual Funds

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