Abstract
The rise of mutual fund advertising is strongly related to the privatization of pensions. Its impact on investment decisions is very important to understand.
As stated by John Bogle in his interview with congress, expenses continue to rise in the mutual fund industry. The rise of advertising in mutual funds is an important determinant of where investment funds will flow. One of the better research publications in this area is Advertising and Portfolio Selection by Henry Cronqvist. http://cerp.unito.it/publications/advertising_and_port/at_download/file
In this publications found the following:
Increase in Advertising Expenditures
“Advertising is an increasingly important phenomena in the mutual fund industry. More and more funds launch large campaigns, involving expensive newspaper advertisements or television commercials. Despite the importance of advertising as a phenomena in the mutual fund industry, financial economists have paid almost no attention to it.”
Reason for the Increase
The reason for this advertising is due to the increased privatization of retirement accounts. Under defined pension benefit systems, there was nothing to advertise. The individual received the pension provided by the company for their pay grade and years of service. However, that changed with the introduction of the 401k in the US. This movement towards retirement investment privatization extends to other countries as well (the example cited in Advertising and Asset Prices is Sweden’s 2000 partial privatization.
“..in the mutual fund industry as a whole, statistics from the Investment Company Institute show that there are 8,256 choices, i.e. there are more funds than stocks to pick from.”
The Results of Fund Advertising
“However, fund advertising is linked to under-performance…fund advertising affects people’s portfolio choices, even when advertising does not contain any information (pertinent to fund selection) Finally fund advertising steers people to portfolios with lower returns and higher risks (through higher exposure to stocks, more active fund management, more hot market segments and much more local concentration.”
“These findings are not consistent with the standard models in economics emphasizing advertising’s information function. Nor are they consistent with arguments that advertising is a compliment to he advertising product. This is inconsistent with the enormous emphasis on content of non-informative advertising, which varies in the cross section of mutual funds.”
“Since advertising was at least partly responsible for the demand shock to equities, especially IT stocks, the evidence…suggests a link between fund advertising and stock prices.”
The Implications for Retirement Accounts
“This paper’s results have implications for regulators and other policy makers, and or mutual fund industry incumbents. It is important to recognize that the objective of fund complexes to sell fund shares to maximize profits for their shareholders, not to maximize retirement savers’ pensions or investors wealth. With advertising and other selling efforts, branded funds can charge investors significantly higher fees than the lower cost supplier in the industry. ”
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