Marketing Mutual Funds

49 Pages Posted: 3 Jan 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: December 26, 2017

Abstract

Marketing and distribution expenses constitute a large fraction of the cost of active management in the mutual fund industry. We investigate their impact on the allocation of capital to funds and on returns earned by mutual fund investors. We develop and estimate a structural model of costly investor search and fund competition with learning about fund skill and endogenous marketing expenditures. We find that marketing is nearly as important as performance and fees for determining fund size. Restricting the amount that funds can spend on marketing substantially improves investor welfare, as more capital is invested with passive index funds and price competition decreases fees on actively managed funds. Average alpha increases as active fund size is reduced, and the relationship between fund size and fund manager skill net of fees is closer to that implied by a frictionless model. Decreasing investor search costs would also imply a reduction in marketing expenses and management fees as well as a shift towards passive investing.

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 (December 26, 2017). 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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