The Only Fund in Town? Geographic Segmentation in the U.S. Mutual Fund Market
37 Pages Posted: 19 Jun 2014
Date Written: June 17, 2014
This study examines the role of geographic competition in the mutual fund industry. We begin with the premise that investors exhibit local preferences in their investment choices, creating geographic segmentation in the mutual fund market. We examine how local competition affects the level of fees charged, as well as the propensity to cut fees in response to entry by other funds. We find that funds located in regions with few competing funds charge higher fees than funds located in more crowded regions. We also find that funds respond to local competition in making the decision to cut their management fees to a much greater degree than they respond to non-local competition. Finally, we examine abnormal returns of funds and find that funds in less competitive areas do not seem to exhibit the skill necessary to command higher fees. Our results suggest that although the mutual fund industry exhibits the characteristics of a competitive industry, this competition appears to be heavily driven by local factors.
Keywords: mutual funds, geography, local bias, fees
JEL Classification: G23
Suggested Citation: Suggested Citation