Competition Among Mutual Funds
Arizona State University (ASU) - Finance Department
Yan Albert Wang
March 1, 2010
Journal of Financial Economics (JFE), Forthcoming
We examine the impact of the entry of new mutual funds on incumbents using the overlap in their portfolio holdings as a measure of competitive intensity. This simple metric delivers powerful economic results. Incumbents that have a high overlap with entrants subsequently engage in price competition by reducing management fees. Distribution fees, however, rise so that investors do not benefit as much from price competition. Funds with high overlap also experience quantity competition through lower investor flows, have lower alphas, and higher attrition rates. These effects only appear after the late 1990s, at which point there appears to be an endogenous structural shift in the competitive environment. We conclude that the mutual fund market has evolved into one that displays the hallmark features of a competitive market.
Number of Pages in PDF File: 45
Keywords: Mutual funds, Incumbents, Competition
JEL Classification: G20, L10, L11
Date posted: March 22, 2008 ; Last revised: August 25, 2011
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