Mutual Fund Performance and Empirical Evidence

G

Most of the studies on mutual fund performance show I and II. On average, mutual funds have been shown to be unable to outperform a buy-and-hold policy after fund expenses are accounted for.

The empirical evidence on mutual fund performance suggests that the correct answer is G. I & II. Let's break down each statement to understand why:

I. Better performance is associated with higher expense ratios. This statement is incorrect. Empirical evidence suggests that higher expense ratios are generally associated with lower mutual fund performance. Higher expenses eat into the fund's returns and can limit the overall performance. Investors should be cautious about investing in funds with high expense ratios.

II. On a net basis, mutual funds under-perform the market on average. This statement is correct. Various studies and research have consistently shown that, on average, mutual funds tend to underperform the market. This underperformance can be attributed to several factors, such as fees, expenses, and the challenge of consistently selecting winning stocks. While some funds may outperform the market in certain periods, the overall average performance tends to be lower.

III. On average, mutual funds do better than the buy-and-hold policy by about 65 basis points. This statement is not supported by empirical evidence. Studies have shown that, on average, mutual funds do not consistently outperform a passive buy-and-hold strategy, such as investing in a low-cost index fund. Actively managed mutual funds often struggle to consistently outperform the market over the long term, and the additional costs associated with active management can erode any potential outperformance.

Therefore, based on the empirical evidence, only statements II and III are accurate, making option G, "I & II," the correct answer.