Why Do Mutual Fund Advisory Contracts Change? Fund Versus Family Influences

48 Pages Posted: 17 Oct 2006

See all articles by Jerold B. Warner

Jerold B. Warner

University of Rochester – Simon Business School

Joanna S. Wu

University of Rochester - Simon Business School

Date Written: September 2006

Abstract

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.

Suggested Citation

Warner, Jerold B. and Wu, Joanna, Why Do Mutual Fund Advisory Contracts Change? Fund Versus Family Influences (September 2006). Simon School Working Paper No. FR 06-15. Available at SSRN: https://ssrn.com/abstract=937952 or http://dx.doi.org/10.2139/ssrn.937952

Jerold B. Warner

University of Rochester – Simon Business School ( email )

Carol Simon Hall 3-160H
Rochester, NY 14627
United States
585-275-2678 (Phone)
585-442-6323 (Fax)

Joanna Wu (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

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