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Abstract:
Berk and Green (2004) argue that investment inflow at high-performing mutual funds eliminates return persistence because fund managers face diminishing returns to scale. Our study examines the role of trading costs as a source of diseconomies of scale for mutual funds. We estimate annual trading costs for a large sample of equity funds and find that they are comparable in magnitude to the expense ratio; that they have higher cross-sectional variation that is related to fund trade size; and that they have an increasingly detrimental impact on performance as the fund's relative trade size increases. Moreover, relative trade size subsumes fund size in regressions of fund returns, which suggests that trading costs are the primary source of diseconomies of scale for funds.

Mutual Fund, Trading Costs, Size, Flow, Soft Dollars

Abstract:
Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. Some of the value of failing passes through to option prices: when failing is cheaper than borrowing, the relation between borrowing costs and option prices is significantly weaker. The remaining value is profit to the market maker, and its ability to profit despite the usual competition between market makers appears to result from a cost advantage of larger market makers at failing.

Abstract:
Retail investors often lack investment expertise. Mutual-fund brokers can help, but their incentives are mixed so it is an empirical question what value they add, both for consumers and for fund families. Investors pay more to invest through unaffiliated brokers than captive brokers, and while unaffiliated brokers add more value to redemptions, captive brokers add more value to inflows. No-load investors are less likely to sell their poor-performing funds and more likely to sell their winning funds, consistent with a disposition effect. Fund families benefit from a captive salesforce through recapture of redemptions, but also suffer through cannibalization of inflows.

Mutual Fund, Financial Intermediary, Brokers

Abstract:
Existing empirical evidence of career concerns in mutual fund management actually confounds concerns about future labor income risk with the fact that younger managers are also learning about the value of their private information. We examine the implications of career concerns, with and without learning, in a calibrated dynamic model of the active fund manager's investment problem. We find that career concerns in the absence of learning cannot account for the observed differences in the allocations of young and old managers. When managers learn about the speed with which the market incorporates their private information, young managers hold larger (smaller) positions than old managers in response to bad (good) news. The measured differences are economically significant to the manager.

Mutual Funds, Career Concerns, Portfolio Choice

Abstract:
Incubation is a strategy for initiating new funds, where multiple funds are started privately, and, at the end of an evaluation period, some are opened to the public. Consistent with incubation being used by fund families to increase performance and attract flows, funds in incubation outperform non-incubated funds by 3.5% risk-adjusted, and when they are opened to the public, they attract higher net dollar flows. Post-incubation, however, this outperformance disappears. This performance reversal imparts an upwards bias to returns that is not removed by a fund size filter. Fund age and ticker-creation-date filters, however, eliminate the bias.

Mutual fund incubation, investment management, bias in returns, fund flows, fund family

Abstract:
We study the roles of traditional governance (boards, sponsors, etc.) and market governance(investors voting with their feet) in mutual funds and variable annuities. We find that market governance is less pronounced for variable annuity investors. Using a matched sample of variable annuity-mutual fund twins, we find that variable annuity investors are less sensitive to poor performance and high fees than mutual fund investors. Given the weaker role played by market governance, we then examine the role played by traditional governance in variable annuities. Variable annuity boards and sponsors add alternative investment options and replace advisors on behalf of their investors after poor performance and high fees. These traditional governance mechanisms are, however, less effective when conflicts of interest exist between variable annuity sponsors and fund advisors.

Governance, Mutual funds, Variable annuities, Board of Directors, Performance sensitivity

Abstract:
This paper examines the impact of brokers’ affiliation and compensation on the mutual-fund flows they intermediate. Across funds we find that, while higher loads associate with lower inflows and higher future performance, higher sharing of those loads with brokers unaffiliated with the family associates with higher inflows and lower future performance. Across fund families we find that brokers captive to the family bring both more cannibalization, i.e. flows into one fund coming at the expense of flows into the rest of the family, and more recapture, i.e. flows out of one fund retained as inflows elsewhere in the family.

Brokers, mutual funds, compensation, cannibalization

Abstract:
Mutual fund commissions often combine payment for trade execution with payment for other services. In addition to reducing the visibility of these operating costs because commissions are not expensed, bundling (into a single payment) decreases their resolution. We examine the impact of commission bundling on fund performance. We find that bundled commission payments are more negatively related to performance than expensed payments suggesting that reducing visibility reduces efficiency. We also find that payments relating to fund distribution – whether bundled with commissions or expensed – are more detrimental to performance than payments relating to portfolio management. Thus, our evidence suggests that the both the visibility of fund operating costs as well as the nature of those costs (research/advisory vs. marketing/distribution) are important determinants of fund performance.

Mutual fund, Performance, Brokerage Commissions, Commission Bundling, Expenses

Abstract:
We study the relative importance of market governance and non-market governance in retirement investments using a sample of variable annuities. Variable annuity investors are significantly less sensitive to performance and fees than mutual fund investors. Consistent with a complementary role of market and non-market governance, other governance mechanisms play a stronger role for variable annuity funds. Variable annuity sponsors add alternative investment options and replace advisors on behalf of their investors after poor performance and high fees. These other governance mechanisms are ineffective, however, whenever conflicts of interest exist between variable annuity sponsors and fund advisors.

Abstract:
Regulations allow market makers to short sell without borrowing stock, and the transactions of a major options market maker show that in most hard-to-borrow situations, it chooses not to borrow and instead fails to deliver stock to its buyers. A part of the value of failing passes through to options prices: when failing is cheaper than borrowing, the relation between borrowing costs and options prices is significantly weaker. The remaining value is profit to the market maker, and its ability to profit despite competition between market makers appears to result from the cost advantage of larger market makers.

G12, G13, G29