Why Do Mutual Fund Advisory Contracts Change? Fund Versus Family Influences
48 Pages Posted: 17 Oct 2006
Date Written: September 2006
We examine changes in equity mutual funds' investment advisory contracts. Contracts generally pay the advisor a fee which is a percentage of the fund's total net assets. There are substantial advisory fee rate changes in both directions, with typical percentage fee shifts exceeding one-fourth. Our tests show that rate increases are associated with superior past market-adjusted performance, whereas rate decreases reflect economies of scale associated with growth. Consistent with family-level influences, there is clustering in the timing and direction of fee rate changes for funds in a given family. Economies of scale from family-level asset growth are reflected in lower advisory fees for individual funds. Superior (e.g., star) performance for individual funds has spillover effects and is associated with rate increases for a family's other funds. We also provide new evidence on fund and fund family choice between linear and piece-wise linear advisory contracts.
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