Demand Curves and the Pricing of Money Management

One reason why funds charge different prices to their investors is that they face different demand curves. One source of differentiation is asset retention: Performance-sensitive investors migrate from worse to better prospects, taking their performance sensitivity with them. In the cross-section we show that past attrition significantly influences the current pricing of retail but not institutional funds. In time-series we show that the repricing of retail funds after merging in new shareholders is predicted by the estimated effect on its demand curve. This result is robust to other influences on repricing, including asset and account-size changes

Valuable Information and Costly Liquidity: Evidence from Individual Mutual Fund Trades

Until recently, all Canadian mutual funds were required to disclose all their individual trades, offering a unique and ideal opportunity to measure and analyze the cost and performance of mutual funds\u27 trades. We find that active management delivers both cheaper trades and better subsequent performance, and that the dissipative effect of flow-driven transactions costs is primarily through forced sales. Fund size associates with both cheaper trades and better subsequent performance, and a series of trades predicts more price movement in the predicted direction, indicating the value to funds of keeping their trading anonymous

Crossborder Dividend Taxation and the Preferences of Taxable and Nontaxable Investors: Evidence From Canada

We consider how fund managers respond to the conflicting preferences of their investors. We focus on the conflict between the taxable and retirement accounts of international funds, which face different tradeoffs between dividends and capital gains. In principle, managers could resolve this conflict through dividend arbitrage, but a proprietary database of dividend-arbitrage transactions shows that in practice they cannot. Thus, managers must resolve it through their investment policies. We find robust evidence that managers with more retirement money favor the preferences of retirement investors and further evidence for this view in the difference between U.S. and Canadian funds’ portfolio weights

Fee waivers in mutual funds

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. Notably, the effective fee charged may be substantially less than indicated in expense ratios and may vary over the year despite a constant contractual fee. This study argues 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 since waivers are less effective in attracting investors than simply lowering contracted fees. Because waivers can change through time, investors prefer funds that lower contracted fees rather than waive. The model and the empirical results confirm this. In light of this cost, there is still incentive to waive. Managers choose waivers as a flexible means of bolstering net performance to attract investors and build asset size. Therefore, a fund is apt to waive when (i) the fund performs poorly and (ii) investors are extremely sensitive to net performance. Both these relations are found in the empirical tests of money market funds. In contrast, there is no evidence that waivers in equity funds depend on the gross returns of the fund. Instead, waivers in equity funds depend on a discrete measure of performance: Morningstar ratings. Gaining a Morningstar rating increases the investors attracted to the fund more significantly than moving ahead in the cross-sectional distribution of returns because Morningstar ratings are more easily understood and observed by investors. The incentive to waive is therefore high near the cut-off points between Morningstar ratings. In general, this analysis of fee waivers highlights that the fee decision is complicated by the combined decisions of the investor, manager, and regulators. From a researcher\u27s perspective, there is more to mutual fund fees than meets the eye