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The Relation between Price and Performance in the Mutual Fund Industry




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    • Gil-Bazo and Ruiz-Verdú are with the Department of Business Administration, Universidad Carlos III de Madrid. The authors thank Campbell Harvey (the editor), an anonymous associate editor, and an anonymous referee for their comments, which have led to substantial improvements in the paper. We are also grateful to Laurent Barras, Clemens Sialm, Massimo Guidolin, Alfonso Novales, Mikel Tapia, Manuel F. Bagüés, Frédéric Warzynski, and Ralph Koijen as well as seminar participants at Tilburg University, IE Business School, University of the Basque Country, Universidad de Navarra, Universitat Pompeu Fabra, Universidad Carlos III de Madrid, Financial Management Association European Conference, and the annual meeting of the European Financial Management Association for helpful comments and suggestions. The usual disclaimer applies. Part of the paper was written while Javier Gil-Bazo was visiting the Finance Department of Tilburg University. The financial support of Spain's Ministry of Education and Science (SEJ2005-06655, SEJ2007-67448, and Consolider-Ingenio CSD2006-16), the BBVA Foundation, and the Madrid Autonomous Region (CCG07-UC3M/HUM-3413) is gratefully acknowledged.


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.