The Mutual Fund Industry

Mutual funds form the bedrock of retirement savings in the United States, and considering the rapid growth of these investments over recent decades, they are sure to become even more important in the coming decades. Because the size of fees paid by investors to mutual fund advisers can strongly affect investors' return on investment, these fees have been a contentious issue, long battled over in Congress and in the courts, with many arguing that fund investment advisers have grown rich at the expense of investors.This groundbreaking book not only divines a new economic model of the industry but uses this model to test price competition between investment advisers. Its highly experienced authors track the growth of the industry over the past twenty-five years and present the arguments and evidence both for and against theories of adviser malfeasance and assertions that market forces fail to protect investors' returns from excessive fees. The volume examines competition by briefly reviewing the regulatory history of mutual fund fees and leading legal case decisions that address excessive fees. Its research also reveals the extent to which the governance structure of mutual funds impacts fund performance. There could be no greater text for those who seek a greater understanding of the contemporary mutual fund industry, including investors, money managers, fund directors, securities lawyers, economists, and those concerned with regulatory policy toward mutual funds.

List of Figures	p. xi
List of Tables	p. xiii
Foreword	p. xvii
Preface	p. xxi
Introduction	p. 1
The Mutual Fund Industry and Its Critics	p. 2
Mutual Funds and U.S. Retirement Assets	p. 3
Mutual Fund Pricing	p. 4
Purpose of the Book	p. 7
Organization of the Book	p. 8
Mutual Fund Industry Growth and Importance in Retirement Plans	p. 11
Mutual Fund Growth	p. 11
Mutual Fund Growth in Retirement Plans	p. 11
Mutual Funds and the Pension Protection Act of 2006	p. 15
Government Pension Plans: Further Opportunity for Growth in Mutual Funds	p. 16
Summary and Conclusions	p. 17
Mutual Funds and Charges of Excessive Fees: The Historical Background	p. 18
Fees are Excessive: The Critics' View	p. 20
Early Mutual Fund Management Malfeasance and U.S. Regulations, 1924–1940	p. 24
The 1950s and 1960s	p. 26
Proposed Regulatory Solutions to Excessive Fees	p. 28
Mutual Fund Excessive Fees and the Courts	p. 30
Gartenberg Case Background	p. 31
The District Court's Decision in Gartenberg	p. 32
The Appellate Court's Decision in Gartenberg	p. 34
Subsequent Court Decisions	p. 44
Summary and Conclusions	p. 46
Price Competition and the Demand for Mutual Funds	p. 48
Prior Studies	p. 49
An Alternative Approach to Examining Competition in the Mutual Fund Industry	p. 52
The Model	p. 53
Estimating the Demand for Mutual Funds and Corresponding Price Elasticities	p. 57
Simulations of the Model	p. 73
Summary and Conclusions	p. 79
Mutual Fund Industry Structure and Indicators of Price Competition	p. 81
Industry Structure	p. 81
Investors' Willingness to Switch Mutual Funds	p. 91
Fund Distribution Channels	p. 91
Product Innovations and Price Competition	p. 95
Further Direct Evidence of Price Competition	p. 95
Summary and Conclusions	p. 96
Mutual Fund Pricing, Excessive Fees, and Empirical Evidence	p. 99
Introduction	p. 99
Mutual Fund Market Segments and Fee Disparities	p. 100
Price Dispersion and Price Competition	p. 107
Economies of Scale in Mutual Funds and Price Competition	p. 112
Increasing Expense Ratios as Evidence of No Price Competition	p. 126
Summary and Conclusions	p. 128
Mutual Funds' Organizational Form and Conflicts of Interest	p. 130
Introduction	p. 130
Assessing Internal Management and Nonprofit Status	p. 131
The Vanguard Group	p. 135
TIAA-CREF	p. 142
Performance Comparisons: Vanguard, TIAA-CREF, and Rival Funds	p. 143
Summary and Conclusions	p. 147
What Have We Learned?	p. 150
Introduction	p. 150
The Excessive Fee Hypothesis	p. 151
Principal Findings	p. 151
Excessive Fees and Mutual Fund Regulation	p. 154
Conclusions	p. 157
Appendix to Chapter Four	p. 159
The Analytical Framework	p. 160
The Single-Nested Model	p. 160
Cost Function	p. 164
Simulation of Competition Between Two Complexes with Four Funds	p. 167
Empirical Estimation of the Nested Logit Demand Model	p. 169
Empirical Estimation of Own-Price and Cross-Price Elasticities	p. 169
The Two-Nested Model	p. 171
The Demand for Funds	p. 171
Complex and Distribution Channel Goodwill	p. 174
Estimation of the Principles of Differentiation Generalized Extreme Value Model	p. 176
Theoretical Aspects of the Principles of Differentiation Generalized Extreme Value Model	p. 176
Solving the Principles of Differentiation Generalized Extreme Value Equation	p. 178
Appendix to Chapter Seven	p. 183
Multivariate Results	p. 183
Notes	p. 187
Bibliography	p. 213
Index	p. 221
Table of Contents provided by Ingram. All Rights Reserved.

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