Mutual fund expenses: Evidence on the effect of distribution channels
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Mari Korpela works at Pohjola Asset Management.
Vesa Puttonen* is a professor of finance at the Helsinki School of Economics. His publications have appeared in a range of journals including Management Science, Journal of Banking and Finance and European Financial Management.
Abstract This paper employs a new set of variables in examining the determinants of fund expenses. The Finnish Association of Mutual Funds requires the industry to disclose new variables such as turnover and tracking error from 2002. Using this information the authors examine whether bank-managed funds are managed more actively than their non-bank competitors, which would explain their higher management fees. Equity and balanced funds distributed through bank offices charge higher expense ratios than funds distributed through independent fund management companies. The results suggest that existing customer relationship, bank cross-selling and convenience rather than operational expenses contribute to fund selection of bank mutual fund customers. Journal of Financial Services Marketing (2006) 11, 17–29. doi:10.1057/palgrave.fsm.4760010 Keywords Mutual funds, fees, distribution channels, customer behaviour, fund activity
INTRODUCTION Mutual funds have received considerable attention in the finance literature. Previous studies have shown that fund size, fund age, fund family size, turnover and external fund growth as well as performance and investment objectives have an effect on mutual fund expenses. Investors choosing a mutual fund should not only consider investment policy, prior performance and risk characteristics, but also the fee structure of the fund. Expenses are worth pointing out since they are one of the few predictable features of fund investing. It has been suggested that fund managers price superior performance by charging *Correspondence: Helsinki School of Economics, Department of Accounting and Finance, Runeberginkatu 22-24, FI-00100 Helsinki, Finland Tel: + 358 9 43138405; Fax: + 358 9 43138678; e-mail: [email protected]
© 2006 Palgrave Macmillan Ltd 1363-0539 $30.00
Vol. 11, 1 17–29
higher operational expenses. However, according to studies such as Gruber1 and Carhart,2 higher expenses are associated with inferior rather than superior management and thus investors should prefer to buy funds with low expense ratios. Carhart2 suggests that wealth-maximising mutual fund investors should become conscious that expense ratio, transaction costs and load fees have a direct and negative impact on fund performance. Moreover, Malkiel3 suggests that most investors would be considerably better off by purchasing low expense index funds than by trying to select an active fund manager who appears to possess a ‘hot hand’ since active fund management generally fails to provide excess returns compared to passive approaches. The objective of this study is to examine variables affecting Finnish mutual fund expenses. Korkeamaki and Smythe4analysed the cross-sectional determinants of fund
Journal of Financial Services Marketing
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