Funds Management Fees - Do you get what you pay for?

Abstract

In this thesis, we study the relationship of 194 mutual funds’ management fees with respect to the funds’ risk-adjusted return, the alpha, derived from the four-factor model as defined by Carhart in 1997. This relationship has been investigated in two steps where the initial step consists of estimating the performance of the individual funds by applying the four-factor model. By using time series regressions on each fund against the factors derived from French (2014), we have seen by how much and whether or not the funds has had a positive or negative risk-adjusted excess return over the chosen time period. The second step involved regressing the alphas against the respective management fees in order to see whether or not these fees have been related to the risk-adjusted returns over time. By subdividing this period into smaller sub-periods we have also seen if this relationship differs between different time periods of the chosen business cycle. The chosen time periods are 2004-2013, 2004-2007 and 2008-2011. The results show that when looking at the full time period, it does not appear to be a relationship between the funds’ management fees and risk-adjusted returns at all. However, between 2004 and 2007 the results indicate a positive relationship but, quite the contrary between 2008 and 2011, suggesting that it does exist a relationship during smaller time periods but none during a full business cycle.