Deferred-Load Mutual Funds: Duds or Divine?
32 Pages Posted: 26 Mar 2002
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: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Risk Taking by Mutual Funds as a Response to Incentives
By Judith A. Chevalier and Glenn Ellison
-
Mutual Fund Flows and Performance in Rational Markets
By Richard C. Green and Jonathan Berk
-
Mutual Fund Flows and Performance in Rational Markets
By Richard C. Green and Jonathan Berk
-
Career Concerns of Mutual Fund Managers
By Judith A. Chevalier and Glenn Ellison
-
Career Concerns of Mutual Fund Managers
By Judith A. Chevalier and Glenn Ellison
-
The Persistence of Risk-Adjusted Mutual Fund Performance
By Edwin J. Elton, Martin J. Gruber, ...
-
By Judith A. Chevalier and Glenn Ellison
-
Hot Hands in Mutual Funds: the Persistence of Performance, 1974-87
By Darryll Hendricks, Jayendu Patel, ...
-
By Narasimhan Jegadeesh, Hsiu-lang Chen, ...