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4-1.2. Fees and Fund Performance

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Investments II: Lessons and Applications for Investors

Universidade de Illinois em Urbana-ChampaignUniversidade de Illinois em Urbana-Champaign

4.8 (385 classificações) | 8.8K alunos inscritos

Curso 4 de 7 no Gestão financeira Programa de cursos integrados

In this course, you will start by reviewing the fundamentals of investments, including the trading off of return and risk when forming a portfolio, asset pricing models such as the Capital Asset Pricing Model (CAPM) and the 3-Factor Model, and the efficient market hypothesis. You will be introduced to the two components of stock returns – dividends and capital gains – and will learn how each are taxed and the incentives provided to investors from a realization-based capital gains tax. You will examine the investment decisions (and behavioral biases) of participants in defined-contribution (DC) pension plans like 401(k) plans in the U.S. and will learn about the evidence regarding the performance of individual investors in their stock portfolios. The course concludes by discussing the evidence regarding the performance of actively-managed mutual funds. You will learn about the fees charged to investors by mutual funds and the evidence regarding the relation between fees charged and fund performance. Segments of the portfolios of mutual funds that may be more likely to outperform and examples of strategies designed to “earn alpha” will also be introduced. Learners are welcome to take this course even if they have not completed "Investments I: Fundamentals of Performance Evaluation," as the first module contain a review of investment fundamentals and regression analysis to get everyone up to speed. Also, the course contains several innovative features, including creative out-of-the-studio introductions followed by quick-hitting "Module in 60" countdowns that highlight what will be covered in each module, four "Faculty Focus" interview episodes with leading professors in finance, and a summary of each module done with the help of animations! This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

Visualizar o programa do curso

Habilidades que você aprenderá

Stock, Financial Markets, Investment Strategy, Investment

Avaliações

4.8 (385 classificações)

5 stars
328 ratings
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KL

Dec 07, 2017

Professor Weisbenner is amazing! Insanely smart, yet delvers complex concepts in such a manner you would never realize it. This is a must take class for investments!

DH

Mar 12, 2018

Professor Weisbenner is phenomenal! The course material is accessible, very well presented, highly informative, and can be applied for the rest of your life.

Na lição

Module 4: Performance of Mutual Funds and Search for Alpha

In Module 4, we will learn about the evidence regarding the performance of actively-managed mutual funds. We will also discuss a few examples of portfolio strategies designed to “earn alpha” (i.e., yield positive risk-adjusted returns).

4-1.1. Overview of Performance of Mutual Funds16:36

4-1.2. Fees and Fund Performance10:35

4-1.3. Brokers and Fund Performance15:12

4-1.4. Trends in Mutual Fund Industry7:56

Ministrado por

Scott Weisbenner
William G. Karnes Professor of Finance

Transcrição

[MUSIC]

A natural question to ask is, is bigger better when it comes to mutual fund fees?

So you'll see various mutual fund fees across your mutual

fund potential investments.

You might naturally assume the higher is the fee charge,

the better is the quality of the fund.

The higher returns are well earned, right?

That logic usually serves us pretty well in life, right?

When you go to a TV store, you look at various TVs.

Some might be priced at 3,000.

Some are priced at 2,000.

Some are priced at 200, okay?

So you usually attribute, if the price is 3,000,

it's higher quality than if the price is 1,000 for the TV, okay?

That's usually what we think of, the prices reflect quality.

How does that logic work if we apply that to mutual fund fees, okay?

So remember the Weisbenner Son Funds company here.

This was launched last year with my my first course on Coursera.

Here, we have Luke looking at the Marketplace page of

the Wall Street Journal.

And you may recall, for those avid learners,

that he charged a 1.5% management fee.

Well, now there's an update.

Weisbenner Son Funds has become Weisbenner Sons Asset Management.

So now the singular son has become plural.

And we can see there's a partner here in the mix.

And they're really studiously looking at what's happening to the kind of stocks,

as kind of displayed here on the financial page.

Their annual management fee is now 2%, okay?

But there is a squabble as to, what's the split of the 2%?

Is it going to be 1.5 for the older brother, Luke, and half a percent for

the younger brother, Jay?

Will they do a 1% split?

But the bottom line for you,

as an investor, is the expense ratio has gone up, okay?

So the question is, are they earning the extra fee they charge?

And just in the interest of full disclosure,

some people have questioned their research methods.

So just keep that in mind before you invest with them.

So let's actually look at this from an academic perspective.

So Gil-Bazo and Ruiz-Verdu did a study looking at a lot of mutual

funds from the period 1962 to 2005.

So they were looking at a ton of data.

And they simply asked a question that we're asking right here in this video.

What's the relationship between the fees and mutual fund charges and

the before-fee performance of the fund?

And they're looking at actively-managed equity funds, okay?

So I hope you're raring to go for this.

And Le Penseur is also very excited, has a question for you here.

In equilibrium, what is the predicted relation between mutual fund fees and

the before-fee alpha, okay, the gross alpha?

Simply, what would you predict as the relationship between the fees charged

by a fund and its returns before fees?

So you can rephrase a question, just say, should we expect funds with high fees

to have higher, the same, or lower alphas than funds with lower fees?

So think about that, and then I'll give you my take.

So what do you think?

If we see a fund with high fees, should it have higher, the same, or

lower alphas than funds with lower fees?

Well, in equilibrium you'd expect you'd get what you pay for, right?

If you get the $3,000 TV, it better be better than the $1,000 TV.

So you'd expect, higher fee, higher return before fees to compensate, right?

That's what you'd expect in equilibrium.

You pay a lower fee, you're getting a lower return before fees, okay?

So is bigger better when it comes to mutual funds?

Let's go back to this academic study.

What do the authors do?

Well, for each month, they estimate a 4-factor model or a 3-factor model

of the fund's performance over the past 60 months, or 5 years.

So for every month t, look at data for that fund over the past 5 years, or

60 months.

Estimate this 4-factor or 3-factor model.

Take the betas that you get from this past-five-year data.

Then actually apply them to the returns that happened during month t.

What was the market return minus the risk free rate?

What was the return of small stocks minus big stocks, or

value stocks minus growth stocks?

Take the actual realized factor returns,

multiply them by those estimated betas from the past five years.

That gets you a benchmark return for the fund.

Compare that to the actual before-expense return in month t

to calculate the fund's alpha for that month.

So take the actual before-expense return of the fund, subtract out this benchmark.

And then you have the before-expense alpha of the fund for that month, okay?

Pool all this data across all the funds and all the months.

And then simply regress these monthly fund alphas on monthly fund expense ratios.

So expense ratios are quoted on an annual basis,

like 0.5% of assets under management,

0.05% of assets under management, 1.5% of assets under management.

So convert these expense ratios into monthly expense ratios and

simply do the regression, monthly fund alpha on monthly fund expense ratios.

So the key question is,

does the coefficient on the expense ratio equal one?

When we do this regression across all the funds, that's our equilibrium prediction.

So let's go see the results.

Quite striking, okay?

And there's different models we can use here.

So the Carhart row we see here is actually the alpha using

a 4-factor model to evaluate performance.

The Fama-French row is using a 3-factor model to evaluate performance, okay?

So what's our results when we use a 4-factor model?

We calculate the alpha of the fund, its risk adjusted performance.

It actually turns out that there's a negative relationship.

Forget the coefficient being 1, it actually seems to be negative.

Funds that have higher expenses seem to deliver not higher returns,

but lower returns.

So you increase the expense ratio by one percentage point.

That predicts the fund underperforms by 0.6 percentage points,

where equilibrium prediction was higher fee, higher return.

It's exactly the opposite.

And these two *s indicate this is a statistically

significant negative estimate.

And this c here indicates that this is definitely statistically

different from our prediction of 1 at the 1% level.

Now, when we do a different risk adjustment, use a 3-factor model,

the Fama-French model, our coefficient estimate still is negative.

It's -0.2, so it suggests the expense ratio goes up one percentage point.

The returns to the fund don't go up one percentage point on average.

They actually go down 0.2%.

That's not statistically different from 0.

But remember, our test is, they should go up on a one-for-one basis,

a positive one-for-one basis.

This c indicates this is definitely statistically different

from our prediction of 1.

So the bottom line is, our prediction was,

this coefficient on the expense ratio should be plus 1.

If anything, it's negative.

Higher expense funds on average, worse performance than the lower expense fund.

And remember, we're looking just at a sample of actively-managed funds.

So the results aren't being driven by low-cost index funds.

We're just looking at a sample of actively-managed funds.

Now, the authors also do an nonparametric analysis, so the earlier results I showed.

And we're looking at the alpha,

the risk adjusted performance from a 4-factor model.

We're just showing the slope of this regression line, okay?

And the slope of this regression line is -0.6.

But the authors also do a nonparametric estimate where they're looking at,

for different expense ratios, what type of alpha do we see?

And you can see this black line here is the nonparametric estimate that

gives different estimates of the alpha, the risk adjusted performance, for

the different expense ratio.

It just doesn't assume there's a linear relationship.

You see this black line is also declining.

And it seems you don't have much data for funds that have expense ratios of 3.5%.

That's why you have kind of very noisy,

these dots here show the 95% confidence intervals around this estimate.

So you can see there's a lot of volatility to this estimate.

But let's take this at face value.

Even for the funds that have a 3.5 expense ratio,

their predicted alpha is maybe 1.5%.

So even if we take the best-case scenario, based on these estimates,

those funds have a 3.5% expense ratio.

They only recover about 1.5% of that on average, in terms of higher returns.

So you, as an investor, are still down 2 percentage points.

So not great news, kind of the intuition that higher prices mean higher quality

doesn't seem to be the case, based on this analysis of the data.

If anything, higher expenses are leading to worse

performance on a gross basis, before you take into account the expenses.

So let's go back to these question.

Are these guys earning the extra fee they charge, okay?

Unfortunately, no, on average, okay?

So, sorry, guys, nothing personal, it's just research.

So I really hope I don't come back to regret this presentation.

And particularly, if they ultimately

do form Weisbenner Sons Asset Management,

I'm going to have to go back and burn this video.

[SOUND]

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