The Abcs of Mutual Funds: A Natural Experiment on Fund Flows and Performance

41 Pages Posted: 29 Feb 2004

See all articles by Vikram K. Nanda

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Z. Jay Wang

University of Oregon - Charles H. Lundquist School of Business

Lu Zheng

University of California, Irvine - Paul Merage School of Business

Date Written: December 2003

Abstract

In the 1990s, a large majority of funds with front-end loads introduced additional share classes, which allowed investors to pay annual fees and/or back-end charges instead of a front-end load. The transition to a multiple-class structure provides a natural experiment with regard to investor clienteles and fund performance. We examine (a) whether the new fee structures increase fund cash flows by attracting investors with different investment horizons and sensitivities to performance; (b) whether changes in the volatility and level of fund flows induced by new investor clienteles affect fund performance - despite little change in fund management and investment objectives. Our finding is that the multiple-class funds, after controlling for performance and fund attributes, attract significantly more new money than the single-class funds. Consistent with the clientele hypothesis, investors in the new classes tend to have a shorter investment horizon and a greater sensitivity to fund performance than investors in the front-end load class. The downside to introducing the new classes, however, is a significant drop in fund performance, which erodes the cash flow benefit of the new classes. Furthermore, the performance drop is shown to be increasing in the relative size of the new classes and in the volatility of their fund flows.

JEL Classification: G00, G2, G23, G12

Suggested Citation

Nanda, Vikram K. and Wang, Zhi Jay and Zheng, Lu, The Abcs of Mutual Funds: A Natural Experiment on Fund Flows and Performance (December 2003). AFA 2005 Philadelphia Meetings, Available at SSRN: https://ssrn.com/abstract=510325 or http://dx.doi.org/10.2139/ssrn.510325

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Zhi Jay Wang

University of Oregon - Charles H. Lundquist School of Business

1208 University of Oregon
Eugene, OR 97403-1208
United States

Lu Zheng (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States
9498248365 (Phone)

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