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The Mutual Fund Industry Worldwide: Explicit and Closet Indexing, Fees, and Performance.

Pedro Matos, USC

28th Oct 2011  11:30 am - 12:30 pm Room 214/215 H69

Mutual fund investors face a basic choice between actively-managed funds and index funds with lower expenses. However, the prevalence of indexing is rare in most countries. Rather, actively managed funds in many countries engage in "closet indexing," choosing portfolios that closely match their declared benchmark. The degree of explicit indexing in a country is negatively related to fees, while "closet indexing" is positively associated with fees and negatively with performance. The most actively managed funds charge higher fees but outperform their benchmarks after expenses. The degree of indexing and the ability of active managers to outperform are both associated with competition and fees.