The Abcs of Mutual Funds: On the Introduction of Multiple Share Classes
40 Pages Posted: 4 Mar 2005
Date Written: February 2005
In the 1990s, many load funds introduced additional share classes that give investors the choice of paying back-end loads and/or annual fees instead of front-end loads. The transition to a multiple-class structure provides a well-controlled setting for research with regard to investor clienteles and fund performance. We examine (a) whether the new fee structures increase the level and volatility of fund cash flows by attracting new investor clienteles; (b) whether changes induced in fund flow characteristics by the new investor clienteles affect fund performance - despite little change in fund management and investment objectives. We find that investors in the new classes tend to have a shorter investment horizon and greater sensitivity to past fund performance than investors in the front-end load class. Introducing the new classes attracts significantly more new money in the first one to two years, controlling for performance and other fund attributes. The downside, however, is that about two years after introducing the new classes, funds experience a significant drop in performance, which is expected to substantially erode the cash flow growth induced by the new classes. The results in the paper have significant implications for empirical studies of mutual funds using the data in the 1990s.
Keywords: mutual fund, share class, performance, flow, expense
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