One reason why funds charge different prices to their investors is that they face different demand curves. One source of differentiation is asset retention: Performance-sensitive investors migrate from worse to better prospects, taking their performance sensitivity with them. In the cross-section we show that past attrition significantly influences the current pricing of retail but not institutional funds. In time-series we show that the repricing of retail funds after merging in new shareholders is predicted by the estimated effect on its demand curve. This result is robust to other influences on repricing, including asset and account-size changes.

We ask whether mutual funds’ flows reflect the incentives of the brokers intermediating them. The incentives we address are those revealed in statutory filings: the brokers’ shares of sales loads and other revenue, and their affiliation with the fund family. We find significant effects of these payments to brokers on funds’ inflows, particularly when the brokers are not affiliated. Tracking these investments forward, we find load sharing, but not revenue sharing, to predict poor performance, consistent with the different incentives these payments impart. We identify one benefit of captive brokerage, which is the recapture of redemptions elsewhere in the family.

Over half of money fund managers voluntarily waive fees they have a contractual right to claim. Moreover, as a consequence of fee waivers, funds on average collect one half of reported expense ratios. Variation in fee waivers is significant and relates to differences in relative performance. Both low-performing retail and institutional funds waive fees to improve their net performance. More interestingly, high-performing retail, but not institutional, funds use fee waivers to strategically adjust net performance to increase expected fund f lows. Despite fund f low incentives, high-performing institutional funds do not waive more because they cannot significantly improve their relative performance. THIS PAPER INVESTIGATES THE OPTIMAL management fee under the assumption that it is not fixed but variable throughout the year. We argue that fee waivers are an indirect method of setting f lexible performance-based fees in an industry that has historically adopted a fee structure that is nominally f lat. To circumvent a suboptimal fixed structure, managers nominally charge higher contractual fees and then selectively waive these fees. The number of money market funds that waive fees has increased over time from 40 percent in 1980 to 63 percent by 1995. In 1995, the gross contractual expense for a typical money market mutual fund was approximately 45 basis points of net assets. For a fund that waived fees, the average waiver was approximately 23 basis points of net assets, or over half a million dollars.

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We consider how fund managers respond to the conflicting preferences of their investors. We focus on the conflict between the taxable and retirement accounts of international funds, which face different tradeoffs between dividends and capital gains. In principle, managers could resolve this conflict through dividend arbitrage, but a proprietary database of dividend-arbitrage transactions shows that in practice they cannot. Thus, managers must resolve it through their investment policies. We find robust evidence that managers with more retirement money favor the preferences of retirement investors and further evidence for this view in the difference between U.S. and Canadian funds' portfolio weights. We consider how fund managers respond to the conflicting preferences of their investors. We focus on the conflict between the taxable and retirement accounts of international funds, which face different tradeoffs between dividends and capital gains. In principle, managers could resolve this conflict through dividend arbitrage, but a proprietary database of dividend-arbitrage transactions shows that in practice they cannot. Thus, managers must resolve it through their investment policies, and we find robust evidence that managers with more retirement money favor the preferences of retirement investors. We find more evidence for this view in the difference between U.S. and Canadian funds' portfolio weights. JEL classification: G11; G23; H20; F30 Correspondence to David K. Musto, Finance