A Look at the Decision Making of Mutual Fund Families

Author

Jeffrey R. Stark, Southern Illinois University CarbondaleFollow

Date of Award

5-1-2014

Degree Name

Doctor of Philosophy

Department

Business Administration

First Advisor

Greene, Jason

Abstract

I examine the motivations of mutual fund families when deciding what mutual funds to launch, when to launch them, and how they are going to be launched. I begin by analyzing the influence of investor preferences on the flow to open-end mutual funds by associating flow to a fund with the degree to which the fund has an in-favor or trendy name. Results show that funds which conform to market-wide trends generate significantly higher inflows compared to less trendy funds. In my third chapter I examine the decision to launch a fund and show that investment companies have motivation, in the absence of any investment ability, to launch a trendy fund. Launching a trendy fund is beneficial to the fund family, generating additional revenue through fee collection, but is potentially harmful to investors with trendy fund startups underperforming non-trendy fund startups by over 1% per year. My fourth chapter examines the process of mutual fund incubation and shows that funds generate greater inflows post-incubation as a result of investors' positive response to incubation period performance. However, incubation appears to be used for reasons beyond generating a track record of performance. Specifically, fund families are more likely to release underperforming incubated funds if they are struggling to attract inflows to a large objective class.