The Only Fund in Town? Geographic Segmentation in the U.S. Mutual Fund Market

37 Pages Posted: 19 Jun 2014

See all articles by Jesse A. Ellis

Jesse A. Ellis

North Carolina State University

Shane Underwood

Baylor University

Date Written: June 17, 2014

Abstract

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

Ellis, Jesse A. and Underwood, Shane, The Only Fund in Town? Geographic Segmentation in the U.S. Mutual Fund Market (June 17, 2014). Available at SSRN: https://ssrn.com/abstract=2455981 or http://dx.doi.org/10.2139/ssrn.2455981

Jesse A. Ellis

North Carolina State University ( email )

Poole College of Management
Campus Box 7229
Raleigh, NC 27695
United States
919-515-9670 (Phone)

Shane Underwood (Contact Author)

Baylor University ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States
254-710-4524 (Phone)

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