Marketing Mutual Funds
49 Pages Posted: 3 Jan 2018
Date Written: December 26, 2017
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
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