Why Do Mutual Fund Advisory Contracts Change? Performance, Growth and Spillover Effects

57 Pages Posted: 12 Feb 2010

See all articles by Jerold B. Warner

Jerold B. Warner

University of Rochester – Simon Business School

Joanna S. Wu

University of Rochester - Simon Business School

Abstract

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

Warner, Jerold B. and Wu, Joanna, Why Do Mutual Fund Advisory Contracts Change? Performance, Growth and Spillover Effects. Journal of Finance, Forthcoming; Simon School Working Paper No. FR 10-13. Available at SSRN: https://ssrn.com/abstract=1552003

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

Joanna Wu (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

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