Competition in the Mutual Fund Industry: Evidence and Implications for Policy

68 Pages Posted: 13 Aug 2007

See all articles by John C. Coates, IV

John C. Coates, IV

Harvard Law School; European Corporate Governance Institute (ECGI)

R. Glenn Hubbard

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Date Written: August 2007


Since 1960 the mutual fund industry has grown from 160 funds and $18 billion in assets under management to over 8,000 funds with $10.4 trillion in assets. Yet critics - including Yale Chief Investment Officer David Swensen, Vanguard founder Jack Bogle, and New York Governor Eliot Spitzer - call for more fund regulation, claiming that competition has not protected investors from excessive fees. Starting in 2003, the number of class action suits against fund advisors increased sharply, and, consistent with critics' views, some courts have excluded or treated skeptically evidence of competition and comparable fees of other funds. Skepticism about fund competition dates to the 1960s, when the SEC accepted the view that market forces fail to constrain advisory fees, in part because fund boards rarely fire advisors. In this article, we show that economic theory, empirical evidence, and careful analysis of the laws and institutions that shape mutual funds refute this view. Fund critics overlook the most salient characteristic of a mutual fund: redeemable shares. While boards rarely fire advisors, fund investors may fire advisors at any time by redeeming shares and switching into other investments. Industry concentration is low, new entry is common, barriers to entry are low, and empirical studies - including new evidence presented in this article - show higher advisory fees significantly reduce fund market shares, and so constrain fees. Fund performance is consistent with competition exerting a strong disciplinary force on funds and fees. Our findings lead us to reject the critics' views in favor of the legal framework established by §36(b) of the Investment Company Act and the lead case interpreting that law (the Gartenberg decision), while suggesting Gartenberg is best interpreted to allow the introduction of evidence regarding competition between funds.

Keywords: mutual funds, investment companies, shareholder litigation, advisory fees

JEL Classification: D4, G18, G2, K22, K23, L1

Suggested Citation

Coates, John C. and Hubbard, Robert Glenn, Competition in the Mutual Fund Industry: Evidence and Implications for Policy (August 2007). Harvard Law and Economics Discussion Paper No. 592, Available at SSRN: or

John C. Coates (Contact Author)

Harvard Law School ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Robert Glenn Hubbard

Columbia University - Columbia Business School, Finance ( email )

3022 Broadway
New York, NY 10027
United States


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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