INVESTOR REACTION TO MUTUAL FUND PERFORMANCE: EVIDENCE FROM UK DISTRIBUTION CHANNELS

Existing work on the flow–performance relation in mutual funds focuses on the average U.S. investor, obscuring the contributions of different clienteles. We analyze UK data on monthly fund sales and purchases made via seven distinct distribution channels. We show that there exist marked differences in the reaction to fund performance between different types of retail and institutional investors. These differences can be understood by considering the incentives of parties involved in each channel. Our analysis indicates that the well‐documented aggregate net flow–performance convexity in mutual funds is driven by the extreme reaction of retail inflows to favorable performance, particularly from independently advised investors.     

Multiple point competition

Situations where firms compete against each other simultaneously in several markets abound in real life. However, there is very little conceptual or theoretical literature on multiple point competition. This paper offers a first attempt at developing a conceptual framework for analysing and understanding situations involving multiple point competition. Several examples are discussed to provide insights into the options available to the competitors and the equilibrium outcomes of such competition.     

Equilibrium market share—a measure of competitive strength

If an oligopoly is modelled as a non-zero-sum game, then the market shares associated with an equilibrium solution can be interpreted as measuring the competitive strength of the firms. By comparing afirm's equilibrium market share with its actual market share, one can conclude whether the firm has positive or negative growth potential in terms of market share, which has some implications for its investment strategy.     

The trade-off between production and transportation costs in determining optimal plant size

An important element of manufacturing strategy is to decide on the shipping radius and the size of a geographically focused plant. This decision involves a trade-off between exploiting economies of scale in production by building a large plant and decreasing transportation costs by building a small plant. The paper presents a model for analysing this trade-off. It is shown that scale economies in transportation facilitate the exploitation of production economies of scale. For an optimal sized plant, the ratio of transportation to production costs does not depend on the absolute cost levels in production and transportation, but only the economies of scale present in production and in transportation.     

What determines fund performance persistence? International evidence

We study performance persistence across a global sample of equity mutual funds from 27 countries. In contrast to the existing U.S.‐based evidence, we find that net performance persistence is present in the majority of fund industries, suggesting that fund manager skill is commonplace rather than a rarity. Consistent with the intuition that more competition in the mutual fund industry makes remaining a winner fund less likely but keeping a loser fund at the bottom of the performance ranks more probable, we show that competitiveness explains the cross‐sectional variation in performance persistence.     

Competitive strategy under uncertainty

Competitive strategy under uncertainty involves a trade-off between acting early and acting later after the uncertainty is resolved, and another trade-off between focusing resources on one scenario and spreading resources on several scenarios, thus maintaining flexibility. This paper analyzes both these trade-offs taking into consideration the nature of uncertainty, industry economics, intensity of competition, and the position of a firm relative to its competitors.     

The flow-performance relationship around the world

We use a new dataset to study how mutual fund flows depend on past performance across 28 countries. We show that there are marked differences in the flow-performance relationship across countries, suggesting that US findings concerning its shape do not apply universally. We find that mutual fund investors sell losers more and buy winners less in more developed countries. This is because investors in more developed countries are more sophisticated and face lower costs of participating in the mutual fund industry. Higher country-level convexity is positively associated with higher levels of risk taking by fund managers.     

MUTUAL FUND PERFORMANCE PERSISTENCE AND COMPETITION: A CROSS‐SECTOR ANALYSIS

Existing work on mutual fund performance persistence obtains diverse results, depending on the group of funds studied. We examine whether performance persistence within a peer group of competing mutual funds depends on the group's composition. The U.K. mutual fund industry is ideal for such an examination because funds compete within strictly defined sectors. We consider several attributes related to the intensity of competition within a sector and use them to explain sector‐level persistence. We find robust evidence that persistence is higher in sectors where concentration of assets under management is higher.     

Advertising persuasion in dual markets

Many firms operate in ‘dual’ markets by selling the same products and services to both individual and institutional customers. Can they also persuade both with the same advertising content? The authors investigate this issue by examining a unique database including information on institutional and individual mutual fund flows, advertising frequency, and (persuasive and informative) advertising content. They find that the effects of persuasive advertising content on institutional and individual fund flows are similar and sizeable in terms of elasticity. In addition, they find that only the individual market responds to informative advertising content. Hence, dual‐market firms can use persuasive content to achieve advertising economies.