Working Paper: NBER ID: w25056
Authors: Nikolai Roussanov; Hongxun Ruan; Yanhao Wei
Abstract: Marketing and distribution expenses are responsible for about a third of the cost of active management in the mutual fund industry. We develop and estimate a structural model of mutual fund marketing with learning about unobserved skill and costly investor search. Our estimates suggest that marketing is nearly as important as performance and fees for determining fund size. Eliminating marketing substantially improves welfare, as capital shifts towards cheaper funds and competition decreases fees. Average alpha increases as active funds shrink, and capital allocation becomes more closely aligned with manager skill net of fees. Declining investor search costs over time imply a reduction in marketing expenses and management fees as well as a shift towards passive investing, as observed empirically.
Keywords: Mutual Funds; Marketing; Investor Behavior; Welfare; Search Costs
JEL Codes: D14; D83; G11; G23; G28; M3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Marketing Expenses (M30) | Fund Size (G23) |
| Marketing Expenses (M30) | Fund Size (High-Skill Funds) (G23) |
| Marketing Expenses (M30) | Fund Size (Low-Skill Funds) (G23) |
| Eliminating Marketing (M31) | Average Expense Ratios (G32) |
| Eliminating Marketing (M31) | Average Alpha (C46) |
| Eliminating Marketing (M31) | Total Share of Active Funds (G23) |
| Eliminating Marketing (M31) | Total Investor Welfare (G19) |