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Mutual Fund Flows and Marketing

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PST)

Manchester Grand Hyatt, Seaport H
Hosted By: American Finance Association
  • Chair: Nikolai Roussanov, University of Pennsylvania

How Important is the Distribution Channel for Mutual Fund Flows?

Bjarne Florentsen
,
Copenhagen Business School
Ulf Nielsson
,
Copenhagen Business School
Peter Raahauge
,
Copenhagen Business School
Jesper Rangvid
,
Copenhagen Business School

Abstract

We use bank failures to analyse exogenous variation in the distribution channel of bank-affiliated mutual funds. Our contribution is three-fold. First, we establish a causal effect from the distribution channel of mutual funds to retail investors’ fund portfolios. As our main empirical result, we secondly document that the magnitude of flows induced by changes in the distribution channel is large; it drives at least a third of households’ mutual fund choices. Third, we show that mutual fund flows are not directed into high-rated funds. We conclude that the distribution channel has a large, causal, and detrimental impact on investors’ portfolios.

Swing Pricing and Fragility in Open-End Mutual Funds

Dunhong Jin
,
Oxford University
Marcin Kacperczyk
,
Imperial College London
Bige Kahraman
,
Oxford University
Felix Suntheim
,
International Monetary Fund

Abstract

We analyze the impact of open-end funds’ alternative pricing mechanisms on their run risks. Alternative pricing (known as swing or dual pricing) adjusts funds’ net asset values to pass on more of funds’ trading costs to shareholders associated with that activity. Using a sample of European corporate bond mutual funds subjected to such rules, we show that these funds are less likely to experience runs during periods of market stress. Fund companies perceive their pricing schemes as a substitute to other potential means of liquidity risk management.

Do Internet Finance Platforms Mitigate Conflicts of Interest? The Case of Mutual Fund Investment

Shang-Jin Wei
,
Columbia University
Chloe Chunliu Yang
,
Fudan University

Abstract

Using proprietary individual investor level trading data from a large mutual fund family in China, we investigate whether financial intermediaries (banks) encourage investors to overtrade in order to obtain more fee income, and whether internet finance platforms help to mitigate the conflict-of-interest problem. The existing literature finds it challenging to rule out the possibility that high-fee intermediaries may justify the extra expense by providing unobserved services. We overcome this challenge by tracking the trading behavior of the same investors (“switchers”) who switch from high-fee trading platforms with account advisors to low-fee platforms without advisors. We find that switchers’ turnover becomes lower after the switch in spite of the lower transaction costs. This is especially true for female investors or investors with a low net worth who are likely more susceptible to intermediaries’ influence. We conclude that online platforms help to mitigate conflicts of interest.

What Do Mutual Fund Investors Really Care About?

Itzhak Ben-David
,
Ohio State University and NBER
Jiacui Li
,
Stanford University
Andrea Rossi
,
University of Arizona
Yang Song
,
University of Washington

Abstract

Two recent influential studies document that mutual fund flows respond to past returns that are adjusted for market exposure, leading one paper to conclude that the Capital Asset Pricing Model (CAPM) is the "closest to the true asset pricing model." We re-examine these tests and find that they cannot reject the null hypothesis that investors make no adjustment for any known systematic risk exposure when allocating capital to funds. Instead, investors rely on simple signals (unadjusted past returns and Morningstar ratings). Furthermore, we present evidence consistent with investors following Morningstar blindly, regardless of the way the ratings are constructed.
Discussant(s)
Jonathan Reuter
,
Boston College
Itay Goldstein
,
University of Pennsylvania
Hongxun Ruan
,
Peking University
Richard Evans
,
University of Virginia and Carlo Alberto College
JEL Classifications
  • G1 - General Financial Markets