Does the management fee signal the performance of equity investment funds in Brazil?

Abstract

Objective: Analyze the relation between the management fee and the risk-adjusted performance before fees of active investment funds classified as Ibovespa and investigate if the difference in fees reflects differences in the value the funds create for the investor. Method: Therefore, a panel regression was applied, using a pooled model in which the funds’ risk-adjusted performance served as the dependent variable and the management fee as the explanatory variable. Then, other control variables were included in the regression. To measure the fund performance, the models of Carhart (1997) and Fama and French (1993, 2015) were used. Results: The results appointed a negative relation between management fee and performance. This indicates that the funds in the sample that cover high fees generally perform worse for the investor. Hence, the different fees also reflect differences in the value the funds create for the investor. In addition, the net equity of a fund is positively related with its performance, while age is negatively related and the Anbima seal did not reveal statistical significance. Contributions: This research adds to the results in the literature as follows: a negative relation is shown between management fee and performance, even when controlling for variables such as size, age and quality in terms of corporate governance. In addition, this relation exists independently of the model used to measure the fund performance; in addition, more current evidence is presented and for an emerging market. Also, evidence is provided that the best corporate governance practices are not related with the achievement of good performance.