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Advertising and Mutual Funds: From Families to Individual Funds

A manager may be able to generate higher returns than an OE benchmark before costs, yet after costs investors’ returns may be below the benchmark. If a fund can beat the OE benchmark on an after cost basis, we say that the fund adds value for investors, to distinguish this situation from one where the manager has investment ability, but either extracts the rents from this ability in the form of fees and expenses, or dissipates it through trading costs. We will say that a manager has investment ability if the managed portfolio outperforms the OE portfolio on a before-cost basis. Formal models of market timing ability were first. | Advertising and Mutual Funds From Families to Individual Funds by Steven Gallaher Southern New Hampshire University Ron Kaniel Duke University and Laura Starks University of Texas Corresponding author Laura Starks Department of Finance Austin TX 78712-1179 512 471-5899 Fax 512 471-5073 LStarks@mail.utexas.edu The authors would like to thank participants in the Wharton Financial Institutions Center mutual fund conference the Financial Management Association meetings and seminars at Duke University Emory University HEC INSEAD the University of Texas at Austin the University of Texas at San Antonio and the University of Virginia for comments on an earlier paper that informed this paper. The authors would also like to thank Keith Brown Roger Edelen Stuart Gillan Jay Hartzell Woodrow Johnson Phong Ngo Brian Reid Jonathan Reuter Stefan Ruenzi Rob Stambaugh Ron Wilcox Hong Yan and Eric Zitzewitz for helpful suggestions on improving the analysis. Advertising and Mutual Funds From Families to Individual Funds Abstract We find that advertising appears to have significant effects on investor flows at the industry family and individual fund level. At the industry level flows are higher in months with more advertising dollars spent even for non-advertising families. At the family level flows have a convex relation with advertising expenditures similar to that for performance with a significant positive effect for high relative advertisers only. At the individual fund level advertising stems redemptions rather than increasing purchases of fund shares. We further find that advertising can affect the fund s flow-performance sensitivity dampening it for poorly performing funds and increasing it for highly performing funds. Advertising and Mutual Funds From Families to Individual Funds Investment companies particularly open-end mutual funds have been the fastest growing segment of the institutional investor community in recent years. Despite the importance of mutual funds questions