Favoritism in Mutual Fund Families? Evidence on Strategic Cross-Fund Subsidization

Abstract

We investigate whether mutual fund families strategically allocate performance across their member funds favoring those more likely to generate higher fee income or future inflows. We find evidence of strategic cross-fund subsidization of 'high family value' funds (i.e. high fees or high past performers) at the expense of 'low value' funds in the order of 6 to 28 basis points of extra net-of-style performance per month, depending on the criteria. This overperformance is above the one that would exist between similar funds not part of the same fund family. We further document how this family strategy takes place by looking at preferential allocation of IPO deals and at the amount of opposite trades among 'high' and 'low value' funds belonging to the same fund complex (a practice that can encompass 'cross-trading'). Our findings complement the existing literature on distortions in delegated asset management by highlighting the role played by family affiliation. They are also relevant to the regulatory debate concerning 'cross-trading' between funds under common management.

Keywords: mutual funds, mutual fund families, family strategies, cross-trading, subsidization

JEL Classification: G23, G10