Revisiting the Performance of Broker-Sold Mutual Funds

Abstract

Del Guercio and Reuter (2014) find that broker-sold actively managed funds underperform both broker-sold index funds and direct-sold actively managed funds by 1.10% per year on a risk-adjusted basis. They argue that broker clients would be better off investing in broker-sold index funds, and puzzle over the fact that index funds manage less than 2% of broker-sold assets at the end of their sample period. Their estimates are based on distribution channel data that cover 1992-2004, and they give equal weight to each fund. In this paper, I revisit the performance of broker-sold funds using distribution channel data that cover 2003-2012, and I give greater weight to funds with more assets under management. Within the sample of broker-sold domestic equity funds, I find that actively managed funds underperform index funds by 0.64% per year (on a comparable risk-adjusted basis), and that the market share of broker-sold index funds remains below 3%. I also estimate return differences between broker-sold and direct-sold funds for the sample of actively managed non-specialized domestic equity funds, the sample of target date funds (TDFs), and a broad sample of actively managed funds. It is worth noting that the evidence of underperformance by broker-sold funds is much stronger among domestic equity funds and TDFs than it is within the broad sample of actively managed funds.

Keywords: brokers, conflicts of interest, active management, target date funds