When Cheaper is Better: Fee Determination in the Market for Equity Mutual Funds

Ruiz‐Verdú, Pablo; Gil-Bazo, Javier

doi:10.2139/ssrn.724862

Cited by 19 publications

(15 citation statements)

References 31 publications

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“…Previous studies have noted that price competition alone may not be sufficient to eliminate differences in net performance across funds when investors fail to react to differences in expected performance and management companies react strategically (Christoffersen and Musto, 2002;Gil-Bazo and Ruiz-Verdú, 2008;Gil-Bazo and Ruiz-Verdú, 2009). In this paper, we show that even if investors react rationally to differences in expected performance, market frictions distort their choices with respect to what would be expected in a friction-less market, such as the one described by (Berk and Green 2004), and can generate predictability in fund performance.…”

Section: Discussionmentioning

confidence: 99%

Market Frictions, Investor Sophistication and Persistence In Mutual Fund Performance

Dumitrescu¹,

Gil-Bazo

2012

SSRN Journal

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If there are diseconomies of scale in asset management, any predictability in mutual fund performance will be arbitraged away by rational investors seeking funds with the highest expected performance (Berk and Green, 2004). In contrast, the performance of US equity mutual funds persists through time. In this paper, we report evidence that persistence is less prevalent among hard-to-find funds and investigate whether market frictions can reconcile the assumptions of investor rationality and diseconomies of scale with the empirical evidence. In particular, we extend the setting of Berk and Green (2004) to include entry costs and account for investor heterogeneity in financial sophistication, which we model as differences in reservation returns and the degree of financial constrainedness across investors. We show that for low levels of managerial skill, more visible funds, which are available to a broad set of investors, underperform less visible funds, which are only available to the most sophisticated investors. As managerial skill rises, funds with less sophisticated investors can outperform funds with more sophisticated investors, as a consequence of the interaction of entry costs with financial constraints. Therefore, for a range of managerial skill, hard-to-find funds exhibit less dispersion in equilibrium expected performance. Using data on US equity mutual funds in the 1996-2010 period and different proxies for fund visibility, we find empirical evidence that differences in observed performance are significantly less persistent among hard-to-find funds than otherwise similar funds.JEL codes: G2; G23.

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Section: Discussionmentioning

confidence: 99%

Market Frictions, Investor Sophistication and Persistence In Mutual Fund Performance

Dumitrescu¹,

Gil-Bazo

2012

SSRN Journal

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“…However, several studies (e.g. Jensen, 1969;Gil-Bazo & Ruiz-Verdú, 2008) Berk and Green's line of argumentation has been found by Ippolito (1992) who observed a large and highly significant correlation between fund growth and recent performance.…”

Section: Introductionmentioning

confidence: 99%

The effect of perceived streakiness on the shot‐taking behaviour of basketball players

Csapo

Avugos

Raab

et al. 2014

European Journal of Sport Science

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We examine behavioural changes of basketball players arising from the hot-hand belief and use data of 1216 National Basketball Association games to measure the effect of cold and hot streaks on three proxies of shot difficulty. We find that the more consecutive shots players make (miss), the more difficult (easier) shots become along the three dimensions. Furthermore, most players' performance seems to improve during hot streaks because they attempt more difficult shots while no significant decrease in shooting accuracy takes place. This might explain why most previous studies could not find empirical evidence for the hot-hand belief in basketball when considering in-game field goal shooting.

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“…Although past returns are observable to investors, future returns depend on skills of funds' management, funds' staff, and the funds' investment strategies, which may not be observable. In situations when a fund's management quality is uncertain and the investor may have difficulties in distinguishing between high-and low-quality fund managers (Biong, 2013;Gil-Bazo and Ruiz-Verdú, 2008;Nelson, 1970), companies may infer funds' management quality by the funds' corporate brand credibility (e.g., Erdem and Swait, 1998;Ippolito, 1992;Kotler and Pfoertsch, 2007).…”

Section: Theoretical Framework and Hypothesesmentioning

confidence: 99%

“…The fee structure, reflecting costs or management quality, can be quite complicated and difficult to understand for investors (e.g., Gil-Bazo and Ruiz-Verdú, 2008). In our study the fee is defined as a fixed annually amount per employee the supplier charges for managing the company's pension fund.…”

Section: Supplier's Management Feementioning

confidence: 99%

“…On the contrary, better managed funds charged equal or lower fees than worse performing funds (Christoffersen and Musto, 2002;Gil-Bazo and Ruiz-Verdú, 2009;GilBazo et al, 2010). One explanation behind these findings might be that performancesensitive investors through competition among high performance funds drive fees down (Christoffersen and Musto, 2002;Gil-Bazo and Ruiz-Verdú, 2008).…”

Section: Supplier's Management Feementioning

confidence: 99%

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Buying CSR with employees’ pensions? The effect of social responsible investments on Norwegian SMEs’ choice of pension fund management

Biong

Silkoset

2017

IJBM

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PurposeEmployees often expect an emphasis on financial aspects to be predominant when their employers choose a fund management company for the investment of employees' pension fund deposits. By contrast, in an attempt to appear as socially responsible company managers may emphasize social responsibility in pension fund choices. This study examines to what extent managers for small and medium sized companies emphasize social responsibility (SR) vs. expected returns when choosing investment managers for their employees' pension funds. Design/methodology/approachA conjoint experiment among 276 Norwegian SMEs' decision makers examines their tradeoffs between social and financial goals in their choice of employees' pension management.Furthermore, the study examines how the companies' decision makers' characteristics influence their pension fund management choices. FindingsThe findings show that the employers placed the greatest weight to suppliers providing funds adhering to socially responsible investment (SRI) practices, followed by the suppliers' corporate brand credibility, the funds' expected return, and the suppliers' management fees.Second, employers with investment expertise emphasized expected returns and downplayed social responsibility in their choice, whereas employers with stated CSR-strategies downplayed expected return and emphasized SR. Originality/valueChoice of supplier to manage employees' pension funds relates to a general discussion on whether companies should do well -maximizing value, or do good, -maximizing corporate social responsibility. In this study, doing well means maximizing expected returns and minimizing costs of the pension investments, whereas doing good means emphasizing SRI in this choice. Unfortunately, the employees might pay a price for their companies' ethicality as moral considerations may conflict with maximizing the employees' pension fund value.

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When Cheaper is Better: Fee Determination in the Market for Equity Mutual Funds

Cited by 19 publications

References 31 publications

Market Frictions, Investor Sophistication and Persistence In Mutual Fund Performance

Market Frictions, Investor Sophistication and Persistence In Mutual Fund Performance

The effect of perceived streakiness on the shot‐taking behaviour of basketball players

Buying CSR with employees’ pensions? The effect of social responsible investments on Norwegian SMEs’ choice of pension fund management

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