Competition and Fund Family Product Development

Abstract

Despite extensive evidence of how mutual fund competition affects fund fee and performance outcomes, there is little evidence of how competition affects the incentives of market participants. This paper uses an international sample of active equity mutual funds to examine how product development in mutual fund families is affected by competitive pressure. Fund family product development is defined as improving the quality of existing funds (e.g., level of activity, quality consistency, star funds, and manager changes) or as changes in the fund base (e.g., starting new funds, mergers, and liquidating funds). The results show that greater industry competition motivates fund families to carry out product development through the quality channel rather than the base channel. Furthermore, product quality development increases performance in the family-affiliated funds, and thus benefits the investors. Based on the findings, I argue that competition motivates desired activity in the mutual fund industry and reduces conflicts of interest that stem from the family structure of the industry.