Mutual Fund Performance: An Empirical Decomposition into Stock-Picking Talent, Style, Transactions Costs, and Expenses
Russ Wermers, University of Colorado

The project uses a new database to perform a comprehensive analysis of the mutual fund industry. The results show that funds hold stocks that outperform the market by 1.3 percent per year, but their net returns under perform by one percent. Of the 2.3 percent difference between these results, 0.7 percent is due to the under performance of non-stock holdings, while 1.6 percent is due to expenses and transactions costs. Thus, funds pick stocks well enough to cover their costs. In addition, high-turnover funds beat the Vanguard Index 500 fund on a net return basis. This evidence supports the value of active mutual fund management. (Accepted Spring 2000.)