Can Australian Mutual Fund Fees Be Justified by Their Unconditional Performance or by Their Performance in Economic Recessions?

Abstract

I find that the performance of Australian mutual funds in recessions and non-recessions, that is the performance of the funds conditional on the state of the economy, is an important determinant of the fees that they charge. The unconditional performance is a weighted average of the conditional performance of a fund over recessionary and non-recessionary periods and is only significantly related to fees charged for two categories, namely large-cap blend and mid/small-cap blend funds. For the other four categories studied: large-cap growth, large-cap value, mid/small-cap growth and mid/small-cap value, the gross unconditional alpha does not influence mutual fund fees. I find that large-cap blend managers have skill in generating gross alphas in both recessions and non-recessions and therefore unconditionally also. Large-cap growth managers have skill in generating gross alphas in recessions but not in non-recessions. Many large-cap value managers have skill in generating gross alphas in recessions and many in non-recessions but not many do well in both recessions and non-recessions leading to an insignificant effect of unconditional alphas on fund fees for this segment of funds. Mid/small-cap blend managers have skill in generating gross alphas in non-recessions while mid/small-cap growth managers have skill in generating gross alphas in recessions. There is little evidence for managerial skill in generating gross alphas in either recessions or non-recessions for mid/small-cap value managers.