NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Marketing Mutual Funds

Nikolai Roussanov, Hongxun Ruan, Yanhao Wei

NBER Working Paper No. 25056
Issued in September 2018
NBER Program(s):Aging, Asset Pricing, Corporate Finance, Industrial Organization

Marketing and distribution expenses are responsible for about a third of the cost of active management in the mutual fund industry. We develop and estimate a structural model of mutual fund marketing with learning about unobserved skill and costly investor search. Our estimates suggest that marketing is nearly as important as performance and fees for determining fund size. Eliminating marketing substantially improves welfare, as capital shifts towards cheaper funds and competition decreases fees. Average alpha increases as active funds shrink, and capital allocation becomes more closely aligned with manager skill net of fees. Declining investor search costs over time imply a reduction in marketing expenses and management fees as well as a shift towards passive investing, as observed empirically.

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Document Object Identifier (DOI): 10.3386/w25056

 
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