Mutual Fund Incentive Fees: Determinants and Effects

Abstract

"We investigate the how and why of performance fee provisions in a free contracting environment such as the Italian mutual fund market until 2006. We find weak support for the hypothesis that these provisions emerge as an economically efficient solution in a rational asset management industry plagued by asymmetric information. They appear to emerge mainly as the product of strategic pricing by asset managers wishing to ease market competition, leverage on investors' sentiment, and hedge their cost structure. Alternatively, fears that managers may opportunistically alter funds' investment policies to maximize the option value embedded in the incentive provisions appear unjustified." Copyright (c) 2010 Financial Management Association International.

Does it pay to pay performance fees? Empirical evidence from Dutch pension funds

“…Investment costs include all costs incurred in the investment management process, from strategy, implementation to monitoring the portfolio. 7 In our analysis, we differentiate between two key components, namely management costs and performance fees (see, e.g., Drago, Lazzari and Navone, 2010). We define management costs as the cost of having assets professionally managed which includes the fees paid for security selection, execution and disclosure.…”

Unbundling the Expense Ratio: Hidden Distribution Costs in European Mutual Fund Markets

“…Drago et al . () show that the bank/non‐bank nature of the investment company owner (and even the commercial/mutual banking nature) is relevant in determining the level of the management fee.…”

“…It is important to restate that this is a limitation intrinsic to a well‐known data availability problem for the European mutual fund market where, to the best of our knowledge, no commercial database vendor has made available a dataset with historically accurate data on mutual fund characteristics. Research in this area either uses time series data on fund size and return and a snapshot of fund characteristics (see for example Drago et al ., ) or simply considers a cross‐section of data (as in Khorana et al ., ).…”

“…On the Italian mutual fund market, Drago et al . () report that: ‘… almost half of the funds with a deferred load offer partial or full load waivers depending on the length of the stay in the fund. Most of the funds charging a front load offer either partial or full load waivers should the size of the subscription exceed a stated amount ’.…”

“…Drago et al . () show that the fee structure depends on investors’ perception of market risk and expected returns at the time of the fund's creation.…”