Marketing Mutual Funds
69 Pages Posted: 3 Jan 2018 Last revised: 1 Oct 2018
Date Written: December 26, 2017
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: Suggested Citation