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A RE-EXAMINATION OF THE IMPACT OF EXPENSES ON THE PERFORMANCE OF ACTIVELY MANAGED EQUITY MUTUAL FUNDS

Zakri Y. Bello

Central Connecticut State University, USA.

 

Lisa A. C. Frank

Central Connecticut State University, USA.

 

ABSTRACT

According to the Investment Company Institute, average mutual fund expense ratios declined sixty percent in recent years. We evaluate the performance of domestic equity mutual funds to determine whether this decline in expense ratios had a measurable impact on fund performance. We find that most mutual funds in our sample track the S&P 500 index, and at least thirteen percent outperform the index, providing evidence that the market is not quite efficient. Only a small percentage of the funds underperformed the market; a result that is remarkably different from previously documented findings. Our results show that both expense ratio and portfolio turnover are negatively associated with investment performance. The decline in fund expenses does not appear to be significantly beneficial to fund investors.

Key words: Mutual funds; Expense ratios; Portfolio turnover; Market efficiency, Asset pricing model.

JEL Codes: G23, G10, G11, G14.