The ABCs of Mutual Funds: On the Introduction of Multiple Share Classes

Journal of Financial Intermediation, Vol. 18, No. 3, July 2009

67 Pages Posted: 6 Dec 2009  

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Zhi Jay Wang

University of Oregon - Charles H. Lundquist School of Business

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: December 2008

Abstract

We study a significant innovation with widespread consequences for the mutual fund industry: The introduction of multiple-class funds that give investors a choice among alternative load and fee structures. The transition to a multiple-class structure represents an important step in the evolution of the mutual fund industry. It also provides a well-controlled setting for research on the structure of funds, on investor clienteles and their impact on fund performance and, more generally, about the manner in which financial innovations tend to be adopted. We develop a simple model of a fund’s decision on whether and when to introduce new classes and empirically investigate the model’s predictions that: (a) Funds with more skilled management, less sensitivity of flows to performance, smaller size, higher existing loads and membership in larger families are better positioned to benefit and, therefore, more likely to switch to a multiple-class structure earlier; (b) The new classes increase the level and volatility of fund inflow by attracting investors with short and uncertain investment horizons - which, in turn, can negatively impact fund performance. Our empirical results are generally supportive of the model’s predictions.

Keywords: Mutual Funds, Multiple Share Classes, Fund Flows, Investor Clienteles

JEL Classification: G20

Suggested Citation

Nanda, Vikram K. and Wang, Zhi Jay and Zheng, Lu, The ABCs of Mutual Funds: On the Introduction of Multiple Share Classes (December 2008). Journal of Financial Intermediation, Vol. 18, No. 3, July 2009. Available at SSRN: https://ssrn.com/abstract=1517002

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Zhi Jay Wang (Contact Author)

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

Lu Zheng

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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