Abstract

This study examines the different effects of 12b-1 fees and sale loads on mutual fund flows. We also try to determine if the response of mutual fund flows to 12b-1 fees (or sale loads) is
influenced by investor sophistication. We examine the latter issue by using past flow-toperformance sensitivity of a fund as the proxy variable for the fund’s investor sophistication.
Alternatively, we chose a subset of funds characterized by low asset retention and subsequently being merged. The implication for funds with low asset retention is that most performance-sensitivity investors have migrated to other funds with better prospects, while the merging of funds implies a discrete shift in the fund’s investor base. We test for investor sophistication effects by analyzing the change in fund flows-to-fees relations after the merging of new shareholders. Our results indicate a positive relation between fund flows and 12b-1 fees, but no relation between flows and loads. In addition, the sensitivity of fund flows to 12b-1 fees will be lower for investors with higher performance sensitivity than for investors with the opposite attributes. Additionally, for funds with low asset retention we find a decrease in flows-to-12b-1 fees sensitivity after merging. We provide evidence to support “strategic fee setting and marketing” in the mutual fund industry.  

Keywords

mutual fund marketingfund flowsinvestors’ performance sensitivity