The Determinants of Mutual Fund Starts: Is Real Estate Different?

We examine the decision to start a new mutual fund with particular emphasis on how this decision differences for the case of real estate funds. Our sample includes 1016 fund openings within the German mutual fund industry for the period 1992 to 2010. Within a logistic regression framework, the fund opening decision is related to explanatory variables at the level of (i) the investment objective, (ii) the fund family and (iii) the investment objective within the fund family. To test whether the decision is different for real estate fund openings, we interact the explanatory variables with a dichotomous variable. The results are consistent with the different considerations associated with the decision to open or start a fund which invests in direct real estate as opposed to the opening of indirect investment vehicles such as equity and fixed income mutual funds. We find that all fund opening decisions are positively related to past inflows into the investment objective – an indicator for the growth potential of the industry. Interestingly, this effect is even more pronounced for real estate funds. At the family level, we find that larger fund families and those with more fund openings in the prior period are more likely to open new funds. For real estate fund openings, the size of the fund family is not as important, whereas the total number of fund openings of the family does not increase the real estate fund opening likelihood. As is the case for all other funds, the larger the fraction of the family assets invested in real estate, the higher the probability of another real estate fund opening. This suggests that fund families tend to specialize rather than diversify their product portfolio. At the family-objective level, only the real estate fund opening decision is positively related to past inflows into existing funds. This real estate specific result highlights the importance of existing fund liquidity. Additional analysis, unique to this study, examines the associated own-product cannibalization caused by new real estate funds starts and the impact on liquidity. Overall, these results aim to enhance the decision-making of fund managers and investors.