Mutual Funds

Mutual Funds

Session Chair: Minsoo Kim, The University of Melbourne
Discussants:
Simon Gervais, Duke University
Lubos Pastor, The University of Chicago

Activism, Stock Selection, and Indexing in Equilibrium

Steven Baker, University of Virginia
David Chapman, University of Virginia
Michael GallmeyerUniversity of Virginia

We study a dynamic general equilibrium production economy intermediated by actively and passively managed funds. Two actively managed types arise endogenously through a search mechanism. Activists are socially valuable because they improve productive efficiency that spills over to a low-cost index fund. Stock selectors, through security selection, also improve productive efficiency, with no spillover to other funds. A representative household allocates its wealth to activist, stock selector, and index funds. We characterize the equilibrium impact of changes in search costs, productive efficiency, and index fees. While a decrease in the passive index fee is beneficial to households through cheaper diversification, it also impacts the composition of the managed fund industry where activist funds increase relative to stock selector funds. This effect increases the productive efficiency of the index fund beyond just lower fees.
Paper

Capital Allocation and the Market for Mutual Funds: Inspecting the Mechanism

Jules van Binsbergen, University of Pennsylvania
Jeong Ho KimEmory University
Soohun Kim, Korea Advanced Institute of Science and Technology

We exploit heterogeneity in decreasing returns to scale parameters across funds to analyze their effects on capital allocation decisions in the mutual fund market. We find strong evidence that steeper decreasing returns to scale attenuate flow sensitivity to performance, which has a large effect on equilibrium fund sizes. Our results are consistent with a rational model for active management. We argue that an important fraction of cross-sectional variation in fund sizes is due to investors rationally anticipating the effects of scale on return performance.
Paper

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