Effects of Market Segmentation and Bank Concentration on Mutual Fund Expenses and Returns: Evidence from Finland

Abstract

"A tremendous amount of research examines US mutual funds, but fund markets also thrive in other countries. However, research about these fast growing markets is lacking. This study addresses Finnish funds. Fast growth of the Finnish fund industry, strong bank dominance in the industry and recent EU membership make it an interesting market to examine. The Finnish fund market is also of particular interest since it had the fastest growth among the EU countries during 1996-2000. We find evidence that bank-managed and older funds charge higher expenses but investors are not compensated for paying higher expenses with higher risk-adjusted returns, suggesting a potential agency problem. Overall, Finnish fund expenses have decreased over time, consistent with EU membership reducing market segmentation and generating competition." Copyright Blackwell Publishers Ltd, 2004.

New evidence on the impact of fees on mutual fund performance of two types of funds

“…The funds that employ incentive fees have higher alpha values, which is a measure of performance, as they charge lower expenses. Furthermore, Korkeamaki and Smythe (2004) and Geranio and Zanotti (2005) with studies of smaller economies showed that fees are higher in these smaller economies, and that fees do affect returns adversely. (Babalos, Kostakis, & Philippas, 2009) evaluate the performance Greek domestic funds.…”

Costs associated with mutual funds in Spain

“…Although the sign is negative, the age of the fund is not reflected in a lower management cost-considered linearly, or using its natural logarithm-so that the hypothesis of the existence of a learning curve is not backed up. The lack of a learning curve is also noted in the Italian market by Geranio and Zanotti (2005) and in the Finnish market by Korkeamaki and Smythe (2004) with a surprising positive relation between both variables, age and cost. This result clashes with the empirical evidence generally observable in the North American market, which largely confirms the beneficial effect of this hypothesis.…”

“…For this reason, the model is also estimated by panel data methodology. Among the studies mentioned above, this technique is only applied in Korkeamaki and Smythe (2004) and Geranio and Zanotti (2005).…”

“…This cost accounts for 7.14% of the total operating expenses of a fund, the biggest single item after the management fee. Other charges such as front load (FRONTLOAD) and redemption fee (REDEMFEE) are included in the model as control variables, as they are in Korkeamaki and Smythe (2004) and Geranio and Zanotti (2005). Financially speaking, a shareholder should be indifferent in the face of identical front load and redemption fee for a given period of time and a given fund return.…”

“…There are few studies on costs outside the US market: Korkeamaki and Smythe (2004) deal with the Finnish market, Gil-Bazo and Martı´nez (2004) with Spain, and Geranio and Zanotti (2005) with Italy. It is certainly surprising that economies of learning have not been proved to exist in the European markets, which have been the object of study so far, while the evidence regarding economies of scale does not concur.…”