Mutual funds research

The mutual funds industry has seen unprecedented levels of growth over the past decade. Between 1987 and 1997, mutual funds increased their stock fund holdings from 4.1% to 21.2% of the market. The area of mutual finds research is clearly an important one to the financial services industry and The Wharton Financial Institutions Center has had the opportunity to support important research in this field, with a focus on the competitive structure of the mutual fund industry.

Selected findings

  • Roger M. Edelen and Jerold B. Warner studied the relation between market returns and aggregate flow into U.S. equity funds, using daily flow data. The concurrent daily relation is positive. Their tests show that this concurrent relation reflects flow and institutional trading affecting returns. This daily relation is similar in magnitude to the price impact reported for an individual institution's trades in a stock. Aggregate flow also follows market returns with a one-day lag. The lagged response of flow suggests either a common response of both returns and flow to new information, or positive feedback trading.
  • Using a dataset comprising almost all equity and bond funds in existence in 1996, Nicolaj Siggelkow found that fund providers shift advertising and distribution expenses via so-called 12b-1 fees onto fund shareholders. He also showed that bonds funds with 12b-1 fees are more risky, while having similar returns, than bond funds without 12b-1 fees. Lastly, he found that fund providers shift part of their research expenses onto fund shareholders by generating soft dollars (rebates in form of research services provided by brokers in return for excess commissions paid by fund providers) and not reducing explicit fees.
  • Chitru S. Fernando, Srinivasan Krishnamurthy and Paul A. Spindt examined the "marketability hypothesis," which states that stock splits enhance the attractiveness of shares to investors by restoring prices to a preferred trading range. They examine splits of mutual fund shares because they provide a clean testing ground for the marketability hypothesis, since the conventional rationales for common stock splits do not apply. They found that splitting funds experience significant increases (relative to non-splitting matched funds) in net assets and shareholders. Stock splits did appear to enhance marketability.
  • It is a widespread practice among mutual fund managers to voluntarily waive fees that they have a contractual right to claim. This fact is puzzling and changes how contractual fees should be interpreted by investors, regulators, and academic researchers. Susan Kerr Christoffersen argued that fund managers use fee waivers instead of a flat contracted fee because waivers provide flexibility. Flexible fees are desirable since managers can strategically adjust net advisory fees to current realization in performance as a means of attracting investors. However, it is costly for managers to attain full flexibility in fees. Estimation results suggest that investors react negatively to waivers in comparison with lower fixed net advisory fees.

Working papers on mutual funds research include:

Transaction-cost Expenditures and the Relative Performance of Mutual Funds
John M.R. Chalmers, Roger M. Edelen and Gregory B. Kadlec, November 1999

The Wildcard Option in Transacting Mutual-Fund Shares
John M.R. Chalmers, Roger M. Edelen and Gregory B. Kadlec, November 1999

Aggregate Price Effects of Institutional Trading: A Study of Mutual Fund Flow and Market Returns
Roger M. Edelen and Jerold B. Warner, October 1999

Expense Shifting: An Empirical Study of Agency Costs in the Mutual Fund Industry
Nicolaj Siggelkow, January 1999

Is Share Price Related to Marketability? Evidence from Mutual Fund Share Splits
Chitru S. Fernando, Srinivasan Krishnamurthy and Paul A. Spindt, August 1999

Fee Waivers in Money Market Mutual Funds
Susan Kerr Christoffersen, November 1997

Has the Rise of Mutual Funds Increased Market Instability?
Chitru S. Fernando, Srinivasan Krishnamurthy and Paul A. Spindt, August 1999

How Are Derivatives Used? Evidence from the Mutual Fund Industry
Jennifer Koski and Jeffrey Pontiff, May 1996
This is the preprint version only. For the published version please see: "How Are Derivatives Used? Evidence from the Mutual Fund Industry." Journal of Finance. Vol. 54(2), pp. 791-816. April 1999.

The Structure of Mutual Fund Charges
Tarun Chordia, November 1993
This is the preprint version only. For the published version please see: "The Structure of Mutual Fund Charges." Journal of Financial Economics. Vol. 41 (1), pp. 3-39. May 1996.

The Marketing of Closed-End Fund IPOs
Kathleen Weiss Hanley, Charles Lee and Paul Seguin, November 1995
This is the preprint version only. For the published version please see: "The Marketing of Closed-End Fund IPOs: Evidence from Transactions Data." Journal of Financial Intermediation. Vol. 5 (2), pp. 127-59. April 1996.

Evolution of Capabilities and Industry: The Evolution of Mutual Fund Processing
Daniel A. Levinthal and Jennifer Myatt, December 1994
This is the preprint version only. For the published version please see: "Co-Evolution of Capabilities and Industry: The Evolution of Mutual Fund Processing." Strategic Management Journal. Vol. 15, pp. 45-62. Winter 1994.