Do Chinese Investors Get What They Don't Pay For? Expense Ratios, Loads, and the Returns to China's Open-End Mutual Funds
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In this paper we analyze the performance of China's open-ended mutual funds, using the data of 467 open-ended mutual funds from 60 fund families from January 2010 through April 2015. A paradox emerges. High expense ratios are associated with better performance. Unsurprisingly, in light of studies of US funds, when we benchmark performance against stock indexes with the same style, we find that the performance of most mutual funds does not beat the collection of indexes that most closely track the fund. Also, unsurprisingly, we find fund families with high expense ratios serve investors less well than those with low expense ratios, and, unsurprisingly in light of research on the US mutual fund market, the return reduction is larger than can be accounted for by the difference in expense ratios. Surprisingly, for most mutual funds we find high and similar expense ratios. We rank the mutual fund companies from best to worst, and we name names to help investors pick relatively good fund companies. Investors would earn higher returns by investing in mutual funds with low expense ratios and lower sales loads.
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Scholars@Duke
Edward Tower
Professor Tower specializes in finance, computable general equilibrium modeling, macroeconomics, development economics, microeconomics, and managerial economics. He conducts a majority of his research within the study of trade and development, exploring a variety of variables from tariffs, quotas, and time zone arbitrage, to equities, mutual funds, and index mutual funds. Since he began publishing his work in 1965, he has contributed over 130 articles to leading academic journals and has had several books, chapters, and papers appear in print. Some of his more recent writings include, “School Choice: Money, Race, and Congressional Voting on Vouchers,” completed in collaboration with O. Gokcekus and J. Phillips; “Rational Pessimism: Predicting Equity Returns by Tobin’s q and Price/Earnings Ratio” with M. Harney; and “Predicting Equity Returns for 37 Countries: Tweaking the Gordon Formula” with K. Reinker. Much of his work pertaining to U.S. trade policy has been used to determine congressional voting on protectionist issues based on campaign contributions. His work on financial issues has also played an important role in determining the value of the U.S. stock market. His latest studies involved an investigation of congressional voting on importation of ethical drugs and predicting returns on both foreign and U.S. equity.
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