Index Fund Entry and Financial Product Market Competition

Management Science ◽

10.1287/mnsc.2019.3444 ◽

2020 ◽

Author(s):

Yang Sun

Keyword(s):

Mutual Fund ◽

Low Cost ◽

Market Competition ◽

Active Management ◽

Fund Flows ◽

Cost Index ◽

Index Funds ◽

The Mean ◽

Staggered Entry ◽

Managed Funds

The active money management industry is characterized by both strong competitive pressure from passive investment vehicles and high fees. This paper investigates how the introduction of low-cost index funds affects fund company strategies. The retail mutual fund market is segmented, where unsophisticated investors rely on financial advisers and sophisticated ones invest directly. Exploiting the staggered entry of low-cost Vanguard index funds as competitive shocks, I show that, in response to competition, incumbents sold to self-directed investors reduce their fees by 5% of the mean; however, funds sold with broker recommendations increase their fees by 6% of the mean. Index fund entry also slows the growth of actively managed funds. The responsiveness of broker-sold fund flows to distribution fees increases, suggesting a shift in composition toward less elastic consumers. Further, incumbents increase the degree of active management. The results illustrate why mutual fund fees slowly decline in the aggregate despite competition from lower-cost alternatives. This paper was accepted by Gustavo Manso, finance.

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Do actively managed funds perform better than index funds? A test in the Canadian market

The Bulletin of the Dnipropetrovsk University Series Management of Innovations ◽

10.15421/191616 ◽

2016 ◽

pp. 163 ◽

Cited By ~ 1

Author(s):

C. Alteen ◽

Veit Wohlgemuth

Keyword(s):

Mutual Funds ◽

Low Cost ◽

Cost Index ◽

Index Funds ◽

Equity Mutual Funds ◽

The Us ◽

Canadian Market ◽

Managed Funds ◽

Index Investing

Actuality of the study: Mutual funds are a favourite investment product among many investors. They provide a simple means of diversification, especially for those with smaller amounts of capital, and the popularity of mutual funds has increased with the success of the marketing efforts behind them.Purpose: This study evaluates the performance of actively managed and index mutual funds within the Canadian equities market.Findings: As index investing has increased in popularity, and other markets have become more connected and open, there is a need for research on equity mutual funds in countries outside the US.Originality / Value: The majority of previous research on index funds and actively managed mutual funds is focused on the US market and related indexes such as the S&P 500.Practical implications: This study suggests that, on average, active funds in Canada fail to beat their benchmarks net (but not gross) of the common fee or management expense ratio. Surprisingly, this research finds no positive relationship between higher fees and better gross performance. Actively managed funds also have poorer performance over the long term. This study finds that investors would be better off purchasing low cost index funds as they provide a more secure return.Future research: This study endorses research on other markets with inclusion of additional variables in order to explain gross performance and secure returns.

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Asset Management Fees and the Growth of Finance

The Journal of Economic Perspectives ◽

10.1257/jep.27.2.97 ◽

2013 ◽

Vol 27 (2) ◽

pp. 97-108 ◽

Cited By ~ 71

Author(s):

Burton G Malkiel

Keyword(s):

Asset Management ◽

Financial Services ◽

Low Cost ◽

Active Management ◽

Index Funds ◽

Management Fees ◽

Us Economy ◽

The Difference ◽

Investment Advice ◽

Managed Funds

From 1980 to 2006, the financial services sector of the US economy grew from 4.9 percent to 8.3 percent of GDP. A substantial share of that increase was comprised of increases in the fees paid for asset management. This paper examines the significant increase in asset management fees charged to both individual and institutional investors. One could argue that the increase in fees charged by actively managed funds could prove to be socially useful if it reflected increasing returns for investors from active management or if it was necessary to improve the efficiency of the market for investors who availed themselves of low-cost passive (index) funds. But neither of these arguments can be supported by the data. Actively managed funds of publicly traded securities have consistently underperformed index funds, and the amount of the underperformance is well approximated by the difference in the fees charged by the two types of funds. Moreover, it appears that there was no change in the efficiency of the market from 1980 to 2011. Thus, the increase in fees is likely to represent a deadweight loss for investors. Indeed, perhaps the greatest inefficiency in the stock market is in “the market” for investment advice.

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Performance Appraisal of Asset Management Companies in Bangladesh

International Journal of Economics and Finance ◽

10.5539/ijef.v11n8p53 ◽

2019 ◽

Vol 11 (8) ◽

pp. 53

Author(s):

Avijit Mallik ◽

Saad Niamatullah ◽

Swarup Saha

Keyword(s):

Performance Appraisal ◽

Mutual Funds ◽

Asset Management ◽

Mutual Fund ◽

Active Management ◽

Index Funds ◽

Small Investors ◽

Zero Sum ◽

Managed Funds ◽

Asset Managers

Mutual funds are a type of collective investment scheme where a large number of small investors pool their savings together and entrust it to an asset manager, who manages the capital to maximize returns in exchange for a management fee. While mutual funds and other collective investment schemes are popular in developed markets, with assets under management (AUM) to GDP ratio of 62% globally, they are yet to gain popularity in Bangladesh, where AUM-to-GDP ratio stands at only 0.53%. However, mutual funds and asset management companies have been growing at high rates, with 37 closed-end and 42 open-end funds now in operation, and there is enormous potential for growth in the mutual fund industry in Bangladesh. Since mutual funds are a new product in the Bangladeshi market, a detailed study was performed in order to distinguish skilled asset managers from unskilled asset managers. In this study, “skill” has been defined as the ability to beat the broad-market DSEX index on after-fee basis, with the underlying logic that managers - all of whom charge a management fee - should at least be able to beat a passive investment in the broad DSEX. For purposes of the study, the weekly NAV at market value was of 76 mutual funds managed by 16 asset management companies (AMCs) were collected. The weekly returns for the DSEX and each fund under consideration were calculated separately. Four well-known measures were used to rank each mutual fund utilizing the weekly returns. The measures were Jensen’s Alpha, the Sharpe Ratio, the Treynor Ratio and the Modigliani M2 Alpha ratio. For AMCs managing multiple funds, the measures were asset-weighted to calculate the measure for the AMC as a whole. Our findings illustrated that only 5 out of 16 AMCs managed to beat the DSEX index and earn an alpha over the benchmark. Our findings were in line with academic consensus which states that active management is a zero-sum game and that the majority of actively managed funds will underperform the index on an after-fee basis. Our recommendation is for AMCs to introduce passively-managed index funds which will at least keep up with the market return and minimize fees and trading costs.

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Commodity Mutual Funds

10.1093/oso/9780190656010.003.0014 ◽

2018 ◽

Cited By ~ 1

Author(s):

Gustavo Camilo

Keyword(s):

Mutual Funds ◽

Mutual Fund ◽

Factor Model ◽

Fund Performance ◽

Active Management ◽

Fund Flows ◽

Mutual Fund Performance ◽

Average Risk ◽

Exchange Traded Funds ◽

Fund Expense

The chapter describes the main institutional features of commodity mutual funds, including active management, the assets in which these funds invest, the process through which shares are bought and sold, the fees borne by investors, as well as the risks associated with investing in the funds. It also examines trends in fund flows and the correlations to commodity returns. Correlations to commodity returns are positive but lower than those of commodity exchange-traded funds that invest directly in underlying commodities, as opposed to commodity mutual funds, which invest largely in equities. Lastly, the chapter examines data on fees and net-of-expense commodity mutual fund performance between 1996 and 2016. The data show a decline in fund expense ratios over time, with the exception of large funds, negative average risk-adjusted performance using a four-factor model, and evidence consistent with lack of persistence in fund returns over the sample period.

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