Finance - Theses
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ItemThe Role of Fee Structure in Mutual Fund Management( 2023-07)Mutual funds have become an increasingly popular investment vehicle over the past few decades, with a wide range of options available to investors seeking exposure to various asset classes and investment strategies. However, one of the key factors that investors must consider when choosing a mutual fund is the fees charged by the fund manager. These fees can have a significant impact on an investor's returns over time, and yet they are often poorly understood or overlooked altogether. The purpose of this thesis is to provide a comprehensive analysis of mutual fund fees and their impact on investor returns. This research focuses on the relationship between fees and fund performance, as well as the factors that influence fee levels and how they are disclosed to investors. Chapter One introduces the topic of mutual fund fees, outlining the key research questions and objectives of the study. This chapter also presents a discussion of the various types of fees charged by mutual fund managers. Chapter Two presents a review of the existing literature on mutual fund fees, including both theoretical and empirical research. This chapter provides a critical evaluation of the key theories and models that have been used to analyse mutual fund fees, as well as a summary of the most significant empirical findings in this area. The chapter also identifies gaps in the current literature and sets out the research questions that will be addressed in the subsequent chapters. Chapter Three examines one specific family-level strategy: the loss-leader pricing strategy. In this chapter the discussion is rooted in the question of why do fund families price low some of its member funds. Anecdotal evidence suggests this is due to flow incentives. This chapter provides systematic evidence that supports the existence of strategic pricing and finds rich pattern that fund families are leveraging pricing strategies to maximize family-level benefit. The flow incentive of fund families is reflected by the choice of loss-leader funds and fund-level inflows. Chapter Four gauges how much do fund families and investors care about fund fees by investigating an event study surrounding an SEC policy change. The policy change imposes different level of effect to different share classes of the same fund. The exogenous event provides an opportunity to separate the flow reaction to changes in fees and performance since all share classes of the same fund share the same before-fee risk adjusted returns and differ only in the fee structure. Chapter Four serves as an extension to Chapter Three in that it investigates more deeply into the dynamic of fee, flow and performance. In one aspect, this study adds to the mutual fund literature by introducing the concept of family-level strategic pricing. It challenges the traditional focus on individual fund-level pricing and provides insights into how mutual fund families strategically set prices to influence investor flows. This approach builds on previous research while addressing a gap in the literature by examining the motivations and dynamics behind family-level pricing decisions. It emphasizes that fund families often manage multiple funds with varying performance levels, optimizing fees collectively rather than for individual funds, which has implications for resource allocation and benefits for fund families. In another dimension, the study explores how investors consider mutual fund fees in their investment decisions. It references early research highlighting the impact of fees on investor behavior and includes trading costs as a significant component of a fund's total expenses that can affect fund flows. Additionally, it contributes to the literature on the relationship between mutual fund performance and flows, considering the asymmetric nature of this relationship. What sets this study apart is its inclusion of management fees and operating expenses in the performance-flow sensitivity analysis, emphasizing the direct link between fees and performance and their indirect influence on investor behavior. These insights offer a valuable perspective on the role of fees in shaping investor decisions within the mutual fund industry. Overall, this thesis aims to contribute to our understanding of mutual fund fees and their impact on investor returns. By providing a comprehensive analysis of this important issue, this research can help investors make more informed decisions about their mutual fund investments and can also inform policymakers and regulators as they seek to ensure that the mutual fund industry operates in a fair and transparent manner.