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Rekenthaler Report

The Academic Argument for Expensive Mutual Funds

In the end, it doesn’t wash.

Repent, Sinners!
Last week, I encountered what I never expected to see: an academic article that extols the merits of high-cost mutual funds.

Cheaper is Not Better: On the Superior Performance of High-Fee Mutual Funds--henceforth to be known as CNB--attempts to throw conventional wisdom on its head. The authors, Jinfei Sheng of UC Irvine, Mikhail Simutin of Toronto, and Terry Zhang of British Columbia, claim that, when properly evaluated, higher-cost U.S. equity funds do not perform badly. "We show that after controlling for exposures .... high-fee funds significantly outperform low-fee funds before expenses." Well, that's a first! Let's see how the authors arrived at that conclusion.