Is the mutual fund industry competitive enough?

Jun 25th, 2008 | Filed under: Academic Research, Investment Management Fees | By:
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Industries dominated by fixed costs tend to experience a lot of price competition.  You don’t have to look any further than the airline industry to find evidence of this economic axiom.  In fact, price competition is often even more fierce in growth industries where price cuts are enabled by economies of scale.  For example, the Model T Ford had a price tag of $850 when it was launched – blowing away most rivals priced in the $2000-$3000 range.  Within a few years, the Model T MSRP was around $300 – illustrating to the world the new economics of scale.

But price competition seems to have bypassed one particular fixed-cost business – the money management business.  This, according to an article in the Journal of Investing that was made available for free recently.  The paper by John Haslem of the University of Maryland, Kent Baker of the American University and David Smith of SUNY at Albany has the benign-sounding title “Identification and Performance of Equity Mutual Funds with High Management Fees and Expense Ratios”.  But don’t be fooled.  The authors rail against what they see as a lack of price competition in the US (and by extension the global-) mutual fund industry before examining the relationship between fees and performance.  They even name names – highlighting the US mutual funds with the highest relative fees in the land.

In their words:

More…

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