Impact of Competition on Mutual Fund Marketing Expenses
Abstract
:1. Introduction
2. Hypotheses
3. Data and Methodology
4. Summary Statistics
5. Empirical Analysis
5.1. Hypothesis 1: The Impact of Competition on Marketing Expenses
5.2. Hypothesis 2: The Impact of Competition on Marketing Expenses of Top-Performing Funds
6. Robustness Analysis
6.1. Continuous Competition Variable
6.2. Competition and Family-Level Marketing Expenses
6.3. Impact of Competition on Marketing Expenses, Fund Family Fixed Effect
7. Conclusions
Conflicts of Interest
Appendix A. Variable Definitions
Variables | Definitions |
12b1 Fee | Annual marketing or distribution fee as a ratio of the total net assets |
h_index | Herfindahl index of a Lipper class market segment |
Total Expense Ratio | Annual expense ratio of a fund as a ratio of the total net assets |
Family Net Assets | Total net assets of a fund family expressed in millions |
Fund Age | Age of a fund in months |
Fund Flow | A fund’s annual new net investment as a percentage of previous total net assets |
Fund Performance | Annual holding period return of the fund |
Non-12b1 Expenses | The total expense ratio—12b1 fees |
Return Volatility | Monthly return volatility of a fund |
Total Net Assets | Total net assets of a fund in millions |
Turnover Ratio | Annual turnover ratio of a fund |
Family 12b1 Fee | Average 12b1 fee across all of the funds in the same family in a market segment |
Family Performance | Average fund performance across all of the funds in the same family in a market segment |
Family Age | Average fund age across all of the funds in the same family in a market segment |
Family Flow | Average fund flow across all of the funds in the same family in a market segment |
Family Turn Over Ratio | Average fund turnover ratio across all of the funds in the same family in a market segment |
Appendix B. Description of Lipper Classes4
Lipper Class | Class Name | Investment Focus |
EIEI | Equity Income Funds | High current income and growth of income, dividend-paying equity securities. |
FS | Financial Services Funds | Equity securities of companies engaged in providing financial services. |
H | Health/Biotech Funds | Shares of companies engaged in health care, medicine, and biotechnology. |
LCCE | Large-Cap Core Funds | Large-cap stocks with average P/E, P/B, and three-year sales-per-share growth compared to the S&P 500 Index. |
LCGE | Large-Cap Growth Funds | Large-cap stocks with above-average P/E, P/B, and three-year sales-per-share growth compared to the S&P 500 Index. |
LCVE | Large-Cap Value Funds | Large-cap stocks with below-average P/E, P/B, and three-year sales-per-share growth compared to the S&P 500 Index. |
MCCE | Mid-Cap Core Funds | Mid-cap stocks with average P/E, P/B, and three-year sales-per-share growth compared to the S&P Midcap 400 Index. |
MCGE | Mid-Cap Growth Funds | Mid-cap stocks with above-average P/E, P/B, and three-year sales-per-share growth compared to the S&P Midcap 400 Index. |
MCVE | Mid-Cap Value Funds | Mid-cap stocks with below-average P/E, P/B, and three-year sales-per-share growth compared to the S&P Midcap 400 Index. |
MLCE | Multi-Cap Core Funds | A variety of market cap ranges; stocks with average P/E, P/B, and three-year sales-per-share growth compared to the S&P Super Composite 1500 Index. |
MLGE | Multi-Cap Growth Funds | A variety of market cap ranges; stocks with above-average P/E, P/B, and three-year sales-per-share growth compared to the S&P Super Composite 1500 Index. |
MLVE | Multi-Cap Value | A variety of market cap ranges; stocks with below-average P/E, P/B, and three-year sales-per-share growth compared to the S&P Super Composite 1500 Index. |
MTAA | Mixed-Asset Target Allocation Aggressive Growth Funds | At least 80% of assets in equity securities, with the remainder invested in bonds, cash, and cash equivalents. |
MTAG | Mixed-Asset Target Allocation Growth Funds | A mix of between 60–80% equity securities, with the remainder invested in bonds, cash, and cash equivalents. |
NR | Natural Resources Funds | Natural resources stocks. |
SCCE | Small-Cap Core Funds | Small-cap stocks with average P/E, P/B, and three-year sales-per-share growth compared to the S&P Small Cap 600 Index. |
SCGE | Small-Cap Growth Funds | Small-cap stocks with above-average P/E, P/B, and three-year sales-per-share growth compared to the S&P Small Cap 600 Index. |
SCVE | Small-Cap Value Funds | Small-cap stocks with below-average P/E, P/B, and three-year sales-per-share growth compared to the S&P Small Cap 600 Index. |
TK | Science & Technology Funds | Science and technology stocks. |
UT | Utility Funds | Utility shares. |
References
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1 | They compare a household’s fund purchase decision to buying a large durable good, such as an automobile. In both the cases, consumers must choose from a large number of alternatives, and as in the case of buying a car, brand name, advertising, and distribution ability, etc. will matter for investing in mutual funds, in addition to risk-adjusted return measures. Thus consumers’ purchase decisions—whether for cars or funds—are complicated by the phenomenon of costly search. |
2 | These Lipper classes cover the domestic equity mutual funds. There are two other investment style classifications available for the mutual funds: Wiesenberger Objective codes and Strategic Insight Objective codes. However, the Wiesenberger Objective codes are only available for 1962–1993 and the Strategic Insight Objective codes are available for 1993–1998. Lipper classification is the only style class available for the current data (from 1998 onwards). Also, it is more granular than the other two. |
3 | I have repeated this regression for three competitive market segments and found similar results (not reported here). |
4 | Taken from the adaption by Parida and Tang (2017) from www.crsp.com/products/documentation/lipper-objective-and-classification-codes. |
Variable | Obs. | Mean | Median | Stdev. | L Quartile | U Quartile |
---|---|---|---|---|---|---|
12b1 Fee (%) | 40,671 | 0.611 | 0.501 | 0.363 | 0.250 | 1.000 |
h_index | 53,756 | 0.129 | 0.105 | 0.078 | 0.071 | 0.167 |
Fund Performance | 52,876 | 0.077 | 0.094 | 0.232 | −0.033 | 0.201 |
Log (Fund Age) | 53,746 | 4.557 | 4.644 | 0.881 | 4.060 | 5.124 |
Log (Total Net Assets) | 53,219 | 4.525 | 4.312 | 1.801 | 3.086 | 5.734 |
Fund Flow | 49,409 | 0.135 | −0.075 | 1.351 | −0.188 | 0.114 |
Turnover Ratio | 52,647 | 0.889 | 0.630 | 1.371 | 0.340 | 1.080 |
Log (Family Net Assets) | 53,749 | 8.875 | 9.213 | 2.283 | 7.685 | 10.306 |
Lipper Class | No. of Obs. | 12b1 Fee (%) | Perf. (%) | Age | Total Net Asset | Flow (%) | Turnover Ratio (%) | h_index |
---|---|---|---|---|---|---|---|---|
EIEI | 2207 | 0.620 | 6.810 | 11.930 | 875.960 | 18.973 | 49.619 | 0.149 |
FS | 864 | 0.653 | 7.004 | 11.224 | 177.720 | 4.654 | 145.514 | 0.248 |
H | 1211 | 0.663 | 10.285 | 8.754 | 492.970 | 22.582 | 135.141 | 0.239 |
LCCE | 6386 | 0.622 | 5.289 | 14.219 | 965.530 | 5.049 | 65.718 | 0.154 |
LCGE | 5550 | 0.617 | 4.672 | 12.321 | 866.780 | 13.116 | 87.744 | 0.083 |
LCVE | 3512 | 0.618 | 5.508 | 13.105 | 1245.980 | 9.018 | 58.302 | 0.168 |
MCCE | 2222 | 0.578 | 10.535 | 10.108 | 512.430 | 16.283 | 84.857 | 0.111 |
MCGE | 3684 | 0.597 | 8.400 | 11.294 | 415.520 | 16.068 | 114.856 | 0.068 |
MCVE | 1794 | 0.608 | 9.886 | 8.892 | 538.150 | 26.723 | 74.041 | 0.162 |
MLCE | 5287 | 0.615 | 7.742 | 10.652 | 556.790 | 12.405 | 76.332 | 0.230 |
MLGE | 3897 | 0.616 | 7.680 | 12.137 | 1053.830 | 15.970 | 112.449 | 0.182 |
MLVE | 3199 | 0.609 | 6.768 | 10.143 | 589.880 | 18.205 | 69.642 | 0.088 |
MTAA | 117 | 0.626 | 1.793 | 11.595 | 285.580 | 1.957 | 23.889 | 0.096 |
MTAG | 90 | 0.731 | 2.583 | 6.869 | 176.500 | 9.784 | 33.837 | 0.146 |
NR | 708 | 0.629 | 16.291 | 10.533 | 316.240 | 22.470 | 196.037 | 0.191 |
SCCE | 4274 | 0.573 | 10.219 | 9.897 | 303.930 | 12.277 | 76.504 | 0.066 |
SCGE | 3829 | 0.579 | 9.756 | 10.258 | 256.220 | 8.413 | 111.870 | 0.056 |
SCVE | 2188 | 0.588 | 10.306 | 8.905 | 222.070 | 19.045 | 61.735 | 0.069 |
TK | 1931 | 0.665 | 6.992 | 9.494 | 342.220 | 18.883 | 175.531 | 0.099 |
UT | 806 | 0.649 | 6.665 | 12.906 | 343.840 | 12.064 | 103.186 | 0.118 |
Parameter | Estimate | Error | t Value |
---|---|---|---|
Intercept | 0.594 | 0.037 | 15.930 |
rank3_h | −0.002 | 0.008 | −0.260 |
rank2_h | −0.010 | 0.010 | −1.040 |
rank1_h | −0.019 | 0.011 | −1.770 |
rank0_h | −0.039 | 0.012 | −3.120 |
Fund Performance | −0.060 | 0.016 | −3.790 |
Log (Fund Age) | −0.004 | 0.008 | −0.500 |
Log (Total Net Assets) | −0.089 | 0.003 | −25.900 |
Return Volatility | −0.070 | 0.218 | −0.320 |
Fund Flow | −0.007 | 0.002 | −4.290 |
Turnover Ratio | −0.024 | 0.005 | −5.230 |
Log (Family Net Assets) | 0.061 | 0.003 | 23.590 |
No. of Obs | 32764 | ||
R-squared | 0.196 |
Non-12b1 Expenses | Total Expense Ratio | |||
---|---|---|---|---|
(1) | (2) | (3) | (4) | |
Parameter | Estimate | t Value | Estimate | t Value |
Intercept | 1.400 | 43.350 | 1.850 | 43.950 |
rank3_h | −0.019 | −3.050 | −0.025 | −2.650 |
rank2_h | 0.032 | 4.000 | 0.012 | 1.080 |
rank1_h | 0.039 | 4.680 | 0.027 | 2.240 |
rank0_h | 0.077 | 8.350 | 0.040 | 2.930 |
Fund Performance | 0.024 | 1.640 | −0.036 | −1.850 |
Log (Fund Age) | 0.003 | 0.450 | 0.001 | 0.070 |
Log (Total Net Assets) | −0.046 | −17.190 | −0.152 | −41.150 |
Return Volatility | 3.744 | 16.890 | 3.608 | 12.870 |
Fund Flow | −0.004 | −3.220 | −0.007 | −3.970 |
Turnover Ratio | 0.052 | 5.650 | 0.010 | 1.680 |
Log (Family Net Assets) | −0.047 | −18.640 | 0.027 | 8.950 |
No. of Obs | 32762 | 42751 | ||
R-squared | 0.333 | 0.29 |
Top Quintile | Top Decile | Top Five Percentile | ||||
---|---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | (6) | |
Parameter | Estimate | t Value | Estimate | t Value | Estimate | t Value |
Intercept | 0.647 | 9.160 | 0.665 | 6.020 | 0.796 | 4.740 |
rank3_h | −0.007 | −0.440 | −0.005 | −0.240 | −0.025 | −0.790 |
rank2_h | −0.004 | −0.250 | −0.009 | −0.360 | −0.037 | −1.020 |
rank1_h | −0.026 | −1.520 | −0.025 | −1.050 | −0.070 | −1.930 |
rank0_h | −0.048 | −2.610 | −0.069 | −2.810 | −0.094 | −2.850 |
Fund Performance | −0.008 | −0.190 | −0.017 | −0.290 | −0.040 | −0.520 |
Log (Fund Age) | 0.011 | 1.040 | 0.008 | 0.600 | 0.024 | 1.210 |
Log (Total Net Assets) | −0.103 | −23.870 | −0.106 | −18.980 | −0.116 | −15.100 |
Return Volatility | 0.355 | 0.850 | 0.556 | 1.050 | 0.515 | 0.720 |
Fund Flow | −0.004 | −2.270 | −0.004 | −2.550 | −0.002 | −0.830 |
Turnover Ratio | −0.035 | −5.430 | −0.033 | −4.820 | −0.036 | −3.710 |
Log (Family Net Assets) | 0.059 | 18.600 | 0.060 | 14.750 | 0.056 | 11.040 |
No. of Obs | 5983 | 2874 | 1374 | |||
R-squared | 0.223 | 0.235 | 0.257 |
12b1 Fees | Non-12b1 Fees | Total Expense Ratio | ||||
---|---|---|---|---|---|---|
(1) | (2) | (3) | (4) | (5) | (6) | |
Parameter | Estimate | t value | Estimate | t value | Estimate | t value |
Intercept | 0.563 | 15.060 | 1.469 | 48.390 | 1.889 | 45.460 |
h_index | 0.139 | 2.490 | −0.350 | −7.900 | −0.241 | −3.840 |
Fund Performance | −0.065 | −3.960 | 0.035 | 2.400 | −0.030 | −1.520 |
Log (Fund Age) | −0.004 | −0.470 | 0.002 | 0.280 | 0.000 | 0.000 |
Log (Total Net Assets) | −0.089 | −25.780 | −0.047 | −17.370 | −0.153 | −41.110 |
Return Volatility | −0.101 | −0.460 | 3.817 | 17.300 | 3.660 | 13.050 |
Fund Flow | −0.007 | −4.270 | −0.004 | −3.280 | −0.008 | −3.990 |
Turnover Ratio | −0.024 | −5.190 | 0.052 | 5.640 | 0.009 | 1.670 |
Log (Family Net Assets) | 0.061 | 23.680 | −0.048 | −18.670 | 0.026 | 8.900 |
No. of Obs | 32764 | 32762 | 42751 | |||
R-squared | 0.196 | 0.330 | 0.289 |
Parameter | Estimate | Std. Error | t Value | Estimate | Std. Error | t Value |
---|---|---|---|---|---|---|
Intercept | 0.345 | 0.086 | 4.030 | 0.298 | 0.086 | 3.460 |
h_index | 0.211 | 0.046 | 4.560 | |||
rank3_h | −0.011 | 0.007 | −1.570 | |||
rank2_h | −0.015 | 0.007 | −2.020 | |||
rank1_h | −0.030 | 0.009 | −3.340 | |||
rank0_h | −0.044 | 0.010 | −4.520 | |||
Family Performance | −0.042 | 0.018 | −2.340 | −0.042 | 0.018 | −2.370 |
Log (Family Age) | −0.024 | 0.010 | −2.280 | −0.023 | 0.010 | −2.240 |
Family Turn Over Ratio | −0.005 | 0.004 | −1.220 | −0.004 | 0.004 | −1.180 |
Log (Family Net Assets) | 0.042 | 0.009 | 4.800 | 0.042 | 0.009 | 4.810 |
Family Flow | −0.004 | 0.002 | −2.390 | −0.004 | 0.002 | −2.360 |
No. of Obs | 13732 | 13732 | ||||
R-squared | 0.190 | 0.190 |
Parameter | Estimate | t Value | Estimate | t Value |
---|---|---|---|---|
h_index | 0.103 | 4.300 | ||
rank3_h | 0.002 | 0.420 | ||
rank2_h | −0.008 | −1.440 | ||
rank1_h | −0.012 | −2.200 | ||
rank0_h | −0.031 | −5.430 | ||
Fund Performance | −0.047 | −3.230 | −0.051 | −3.550 |
Log (Fund Age) | −0.024 | −7.790 | −0.024 | −7.720 |
Log (Total Net Assets) | −0.082 | −62.220 | −0.081 | −62.040 |
Return Volatility | −0.139 | −1.270 | −0.169 | −1.550 |
Fund Flow | −0.007 | −6.000 | −0.007 | −5.930 |
Turnover Ratio | −0.030 | −12.740 | −0.029 | −12.690 |
Log (Family Net Assets) | 0.049 | 15.250 | 0.049 | 15.290 |
No. of Obs | 46864 | 46864 | ||
R-squared | 0.337 | 0.337 |
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Parida, S. Impact of Competition on Mutual Fund Marketing Expenses. Int. J. Financial Stud. 2018, 6, 29. https://doi.org/10.3390/ijfs6010029
Parida S. Impact of Competition on Mutual Fund Marketing Expenses. International Journal of Financial Studies. 2018; 6(1):29. https://doi.org/10.3390/ijfs6010029
Chicago/Turabian StyleParida, Sitikantha. 2018. "Impact of Competition on Mutual Fund Marketing Expenses" International Journal of Financial Studies 6, no. 1: 29. https://doi.org/10.3390/ijfs6010029
APA StyleParida, S. (2018). Impact of Competition on Mutual Fund Marketing Expenses. International Journal of Financial Studies, 6(1), 29. https://doi.org/10.3390/ijfs6010029