Favoritism in Mutual Fund Families? Evidence on Strategic Cross-Fund Subsidization

We investigate whether mutual fund families strategically transfer performance across member funds to favor those more likely to increase overall family profits. We find that ‘High family value’ funds (i.e. high fees or high past performers) over-perform at the expense of ‘Low value’ funds. Such performance gap is above the one existing between similar funds not affiliated to the same family. Better allocations of underpriced IPO deals and opposite trades across member funds explain partly why ‘High value’ funds over-perform. Our findings highlight how the family organization prevalent in the mutual fund industry generates distortions in delegated asset management. * Gaspar is at ESSEC Business School; Massa and Matos are at INSEAD. We thank an anonymous referee, Marshall Blume, Bernard Dumas, Randy Cohen, Chris Gezcy, William Goetzmann, Sendhil Mullainathan, David Musto, Richard Kihlstrom, Urs Peyer, Jonathan Reuter, Steve Ross, Ana Scherbina, Clemens Sialm, Erik Sirri, Robert Stambaugh (the editor), Peter Tufano, Theo Vermaelen, and participants at the EFA meetings for their comments. Any remaining errors are our own. Financial support from INQUIRE Europe and Fundação para a Ciência e Tecnologia (Gaspar and Matos) is gratefully acknowledged.