Fund Flow Diversification: Implications for Asset Stability, Fee-Setting and Performance

Abstract

We provide new evidence on the economic benefits to mutual fund families from having a portfolio of funds with diversified investor fund flows. We show that diversified fund families enjoy greater stability of assets under management, and experience significantly lower net cash outflows during an economic downturn. Given concave advisory fee schedules, the dominant industry fee structure, a reduction in asset volatility is potentially advantageous for family-level fee revenues. Consistent with this notion, we show that fund families with more diversified fund flows are able to strategically charge more competitive advisory fees across their funds. Our findings suggest that the diversification of fund families’ asset flows is an important source of net performance gains for fund shareholders. These gains arise mostly in the more competitive industry segments.

Keywords: Fund Flow Diversification, Advisory Fees, Asset Volatility, Fund Family Performance

JEL Classification: G23