Marketing Mutual Funds

69 Pages Posted: 3 Jan 2018 Last revised: 23 Sep 2018

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Hongxun Ruan

University of Pennsylvania - The Wharton School

Yanhao Wei

University of Southern California - Marshall School of Business

Date Written: September 12, 2018

Abstract

Marketing and distribution expenses are responsible for about a third of the cost of active management in the mutual fund industry. We develop and estimate a structural model of mutual fund marketing with learning about unobserved skill and costly investor search. Our estimates suggest that marketing is nearly as important as performance and fees for determining fund size. Eliminating marketing substantially improves welfare, as capital shifts towards cheaper funds and competition decreases fees. Average alpha increases as active funds shrink, and capital allocation becomes more closely aligned with manager skill net of fees. Declining investor search costs over time imply a reduction in marketing expenses and management fees as well as a shift towards passive investing, as observed empirically.

Keywords: mutual funds, distribution costs, broker commissions, performance evaluation, capital misallocation, investor welfare, financial regulation, structural estimation, search costs, information frictions, household finance

JEL Classification: G11, G28, D14, M31

Suggested Citation

Roussanov, Nikolai L. and Ruan, Hongxun and Wei, Yanhao, Marketing Mutual Funds (September 12, 2018). Available at SSRN: https://ssrn.com/abstract=3093438 or http://dx.doi.org/10.2139/ssrn.3093438

Nikolai L. Roussanov (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Hongxun Ruan

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Yanhao Wei

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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