The Performance of Bank‐managed Mutual Funds

Abstract

The ability of banks to offer proprietary mutual funds has expanded over recent years, and the mutual fund industry has been a significant growth area for banks. I examine the growth and performance of bank proprietary bond mutual funds. The empirical results show no evidence that bank‐managed mutual funds underperform nonbank funds. I find some evidence that bank managers are more conservative than nonbank managers in terms of investment strategy and that banks appear more likely to target individual rather than institutional investors. Also, I find that abnormal fund performance does not appear to be a significant determinant of the net asset flows into and out of bank‐managed mutual funds. Rather, the results suggest bank investors rely mainly on past marketing information and the general reputation of the bank. JEL classification: G11, G21

The Impact of Advertising on Fund Flows in Alternative Distribution Channels

“…We focus on the influence of star ratings as of year-end 1999 and expect funds with more stars to have higher flows. Frye (2001) examines the difference in fund flows for bank-managed bond funds compared to non-bank operated bond funds and finds that the bank-managed funds appear less sensitive to past performance. We control for differences in flows between bank and non-bank funds with an indicator variable equal to one if a bank operates fund classes.…”

“…The construction of this variable varies somewhat across studies. A combination of raw return and risk-adjusted measures are commonly used (see Jain and Wu, 2000;Frye, 2001;Barber, et al, 2005;Zoran and Weisbenner, 2009). We use raw returns for the previous three years in our analysis.…”

“…Our examination of bond fund asset flows is most closely related to Frye (2001). However, we expand that analysis using a larger sample and a richer empirical model that incorporates a broader set of factors thought to influence asset flows.…”

“…While a true statement, Jain and Wu only control for four other non-return factors in their empirical model (Note 8). Subsequent research (Frye, 2001;DelGuercio and Tkac, 2002 a, b) and discussion below argues for a broader range of fund characteristics that impact flows and could therefore be argued as appropriate characteristics along which to construct control groups. Moreover, Jain and Wu (2000) and Barber, et al (2005) find qualitatively similar results when using a broader control group.…”

“…Atkinson, Baird, and Frye (2003) examine bond fund flow determinants as they relate to female fund managers and therefore have a limited sample. Finally, Frye (2001) examines the flow/performance relationship of bank managed versus non bank-managed bond funds. She finds that past performance is not as critical to bond flows for bank-operated funds as it is for non bank-managed funds and concludes that other bank characteristics such as reputation and reduction of search costs are more important.…”