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The Relation between Price and Performance in the Mutual Fund Industry

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  • JAVIER GIL‐BAZO
  • PABLO RUIZ‐VERDÚ

Abstract

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.

Suggested Citation

  • Javier Gil‐Bazo & Pablo Ruiz‐Verdú, 2009. "The Relation between Price and Performance in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 64(5), pages 2153-2183, October.
    • Handle: RePEc:bla:jfinan:v:64:y:2009:i:5:p:2153-2183
    DOI: 10.1111/j.1540-6261.2009.01497.x
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