Mutual Fund Performance: An Empirical Decomposition into Stock‐Picking Talent, Style, Transactions Costs, and Expenses

TLDR

The study analyzes the mutual fund industry using a new database. Funds outperform the market on gross stock holdings by 1.3 % per year, but after accounting for nonstock holdings, expenses, and transaction costs, their net returns lag by 1 %, indicating that while stock picking covers costs, active management still adds value, especially for high‑turnover funds that beat the Vanguard Index 500 on a net basis.

Abstract

We use a new database to perform a comprehensive analysis of the mutual fund industry. We find that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns underperform by one percent. Of the 2.3 percent difference between these results, 0.7 percent is due to the underperformance of nonstock holdings, whereas 1.6 percent is due to expenses and transactions costs. Thus, funds pick stocks well enough to cover their costs. Also, high‐turnover funds beat the Vanguard Index 500 fund on a net return basis. Our evidence supports the value of active mutual fund management.