New evidence on the impact of fees on mutual fund performance of two types of funds

• Fund managers’ reported returns are overstated compared to after-fees returns computed.
• Advanced econometric tests refute alleged market timing skills of managers.
• By comparing equity-only conventional and Islamic funds, we find performance is similar.

The impact of fees on mutual fund performance has received little research attention as is also the cases of performance differences of two classes of funds, one the common mutual funds and the other mutual funds with strict compliance with filters based on a number of binding restrictions as in Islamic mutual funds. After confirming the average returns over 20 years against the market benchmark of equity only funds, this paper reports significant reductions due to fees. The publicly reported performance of substantial returns to investors is whittled away to a small return once the different fees charged by funds are factored in. Another significant finding is that the evidence in prior research in support of market timing ability of funds disappears once the econometric problems of the methodology in prior research are addressed by using panel regression method. We believe that these two findings add new insights on the impact of different fees on returns to investors and further help to highlight the need to address methodological problems in mutual fund studies.