Deferred-Load Mutual Funds: Duds or Divine?

32 Pages Posted: 26 Mar 2002

See all articles by Matthew R. Morey

Matthew R. Morey

Pace University - Lubin School of Business - Department of Finance and Economics

Date Written: March 18, 2002

Abstract

Previous research suggests that deferred-load mutual funds should, all else being equal, be able to attain better long-term performance than front-load or no-load mutual funds. The reason for this is that deferred- load funds can dissuade redemptions better than these other funds and hence can hold less cash while at the same time holding greater amounts of relatively illiquid (and hence higher performing) assets. In this paper we examine whether this is true using a sample that is robust to survivorship bias, examines a long (six year) out-of-sample time horizon and, in general, is much more comprehensive than any other sample used in previous research. Our results indicate that rather than performing better than no-load funds, deferred-load funds show no ability to outperform no-load funds and the point estimates indicate, if anything, deferred- load funds perform worse than no-load funds. As to why we find such results we have two very plausible explanations. First, as is well known, deferred-load funds have much higher expense ratios than other types of funds. Second, and more interestingly, we find that the compositional advantages of deferred-load funds as predicted by others simply do not exist during our out-of-sample period. That is, deferred- loads after about 1995 do not hold less cash nor hold more illiquid assets than similar front- or no-load funds. We speculate that the reason for this is likely due to the amazing rise in multiple share classes that took place after the SEC implemented rule 18f-3 in February 1995 that specifically allowed the practice of multiple share classes.

Keywords: Deferred Loads, Mutual Fund Performance, Expense Ratios

JEL Classification: G23

Suggested Citation

Morey, Matthew R., Deferred-Load Mutual Funds: Duds or Divine? (March 18, 2002). Available at SSRN: https://ssrn.com/abstract=304567 or http://dx.doi.org/10.2139/ssrn.304567

Matthew R. Morey (Contact Author)

Pace University - Lubin School of Business - Department of Finance and Economics ( email )

One Pace Plaza
New York, NY 10038-1502
United States
212-618-6471 (Phone)

HOME PAGE: http://webpage.pace.edu/mmorey/

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