Expense ratios and net alphas of large cap funds

Do expenses add value?

Abstract

Global equity markets witnessed a tumultuous time-period of decline followed by growth, starting from the early part of 2000 to the beginning of the current period. Investment in actively managed mutual funds also experienced a decent growth over the same period though there were times when investors especially retail investors sat on the sidelines and seemed reluctant to invest in equity funds. This study analyzes the performance of large cap equity funds between January 2000 and December 2013. The main objective is to assess the performance as reflected in the alpha of funds conditioned on expenses. We apply both OLS regression and ranked portfolio approaches to estimate the abnormal performance. Results of this study show that large cap funds underperform against benchmarks after incorporating expenses. Results also suggest that expenses are not the only reason behind their underperformance.