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Gains to Mutual Fund Sponsors Offering Multiple Share Class Funds

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  • Vance P. Lesseig
  • D. Michael Long
  • Thomas I. Smythe
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    Abstract

    Although the number of mutual funds grew during the 1990s, much of the growth is attributable to the introduction of multiple share class (MS) funds. Proponents argue that the MS structure leads to cost savings, which can be passed onto investors as lower expenses. However, if the structure lowers costs, sponsors are likely to profit from it. Though investors are concerned about the base expense ratio, the sum of administrative and management fees, fund sponsors generate profits from the management fees. As such, they would prefer to increase the management fee if they can simultaneously lower administrative fees. Our results indicate that MS fund investors pay lower administrative fees, but management fees are approximately 7 basis points higher than single-class funds. Overall, base expense ratios are higher than for single-class funds, suggesting fund sponsors capture the cost benefits the MS structure provides. Our results are robust to different model specifications and different estimation techniques. Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal The Journal of Financial Research.

    Volume (Year): 25 (2002)
    Issue (Month): 1 ()
    Pages: 81-98

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    Handle: RePEc:bla:jfnres:v:25:y:2002:i:1:p:81-98

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0270-2592
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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. Beth Pontari & Andrea Stanaland & Tom Smythe, 2009. "Regulating Information Disclosure in Mutual Fund Advertising in the United States: Will Consumers Utilize Cost Information?," Journal of Consumer Policy, Springer, vol. 32(4), pages 333-351, December.
    2. Isabel Toledo & Roc�o Marco, 2010. "Costs associated with mutual funds in Spain," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(2), pages 165-179.
    3. Gil Bazo, Javier & Martínez Sedano, Miguel Angel, 2003. "The Black Box of Mutual Fund Fees," DFAEII Working Papers 2004-01, University of the Basque Country - Department of Foundations of Economic Analysis II.
    4. Nanda, Vikram K. & Wang, Z. Jay & Zheng, Lu, 2009. "The ABCs of mutual funds: On the introduction of multiple share classes," Journal of Financial Intermediation, Elsevier, vol. 18(3), pages 329-361, July.

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