Mutual Funds' Performance: The Role of Distribution Networks and Bank Affiliation

Abstract

The paper investigates how the characteristics of the distribution network and the affiliation to a banking group affect mutual funds performance exploiting a unique dataset with extremely detailed information on funds’ portfolios and bank-issuer relationships for the period 2006-2017. We find that bank-affiliated mutual funds underperform independent ones. The structure of the distribution channels is a key-factor affecting mutual funds' performance: when bank platforms become by far the prevalent channel for the distribution of funds’ shares, asset management companies are captured by banks. As for bank affiliation, results show a positive bias of bank-controlled mutual funds towards securities issued by their own banking group clients (of the lending and investment banking divisions) and by institutions belonging to their own banking group; this last bias is exacerbated for mutual funds belonging to undercapitalized banking groups. The structure of the distribution channels explains two thirds of bank-affiliated mutual funds underperformance, whereas investment biases explain one fourth of the observed differential in returns with independent mutual funds.

Keywords: mutual funds, mutual funds performance, distribution networks, conflict of interest

JEL Classification: G23, G21, G11, G32