Mar

6

Article by Daily Spec's Professor Ross Miller, from Alex Castaldo, in latest issue of Journal of Investment Management.

This article describes a rigorous method for allocating fund expenses between active and passive management. It also enables one to compute the implicit cost of active management. Computing this "active expense ratio" requires only a fund's published expense ratio, its R-squared relative to a benchmark index, and the expense ratio for a competitive fund that tracks that index. This method is then applied to the Morningstar universe of large-cap mutual funds and active expense ratios are found to average more than 7%. The cost of active management for other classes of mutual funds is also found to be substantial.


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