Thursday, May 12, 2011

Worldwide Research on Indexing Examines Fees and Performance

Recent research on worldwide mutual fund indexing examined explicit indexing, closet indexing, fees, and fund performance. The results are interesting. (Hat tip to the Stingy Investor for pointing out this paper.)

Countries differ in the number of index funds available, and they differ in the degree to which actively-managed funds pretend to manage actively, but actually stay close to an index (closet indexers). Here are some of the findings:

1. The more explicit indexing available in a country, the lower fund fees tend to be.

2. The more closet indexing in a country, the higher fund fees tend to be.

3. The more closet indexing in a country, the worse fund performance tends to be.

4. The most actively-managed funds (furthest from closet indexing) tend to charge higher fees, but also tend to have higher returns.

To oversimplify, this paper says that explicit indexing is good, closet indexing is bad, and true active management is better than closet indexing.

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