Why Do Mutual Fund Advisory Contracts Change? Performance, Growth and Spillover Effects
57 Pages Posted: 12 Feb 2010
We examine changes in equity mutual funds’ investment advisory contracts. There are substantial advisory compensation rate changes in both directions, with typical percentage rate shifts exceeding one-fourth. We find that rate increases are associated with superior past market-adjusted performance, whereas rate decreases reflect economies of scale associated with growth, and are not associated with extreme poor performance. There are within-family spillover effects. For example, superior (e.g., star) performance for individual funds is associated with rate increases for a family’s other funds. We also document fee rate reductions post-2004 by family funds involved in market-timing scandals, but find no evidence of a spillover to the broader industry.
Keywords: mutual funds, advisory fees, compensation, contracting, spillover effects, market-timing scandals
JEL Classification: G20, G23
Suggested Citation: Suggested Citation