Academic journal article Journal of Applied Finance

The Role of Money Market Mutual Funds in Mutual Fund Families

Academic journal article Journal of Applied Finance

The Role of Money Market Mutual Funds in Mutual Fund Families

Article excerpt

This study examines cross-sectional differences among money market mutual funds (MMMFs) in the context of sponsoring fund families. The study finds that flows to family non-MMMFs are negatively related to family MMMF flows, and family non-MMMF cashflow volatility is positively related to family MMMF cash flow volatility. This suggests that families can offset cash transactions between MMMFs and non-MMMFs and that families place non-MMMFs cash in family MMMFs. Furthermore, loads positively affect cash flow volatility of MMMFs, suggesting that fund family investors also use family MMMFs as cash centers by utilizing free asset transfers within the family. Application of these strategies can translate into significant benefits for the fund family and its investors.

(ProQuest: ... denotes formulae omitted.)

*Money market mutual funds (MMMFs) have existed for more than three decades, with the first one introduced in 1972. By 1984, 305 MMMFs existed, totaling nearly $270 billion in assets. Over the twenty-year period through 2006, assets of MMMFs increased to $2.4 trillion across 848 funds, representing approximately 25% of the US open-end mutual fund assets.1

Few cross-sectional studies analyze MMMF performance and flow characteristics. Domian and Reichenstein (1997) examine the factors that affect the cross-section of net returns and the persistence of relative returns through time. They find that expense ratio is the most important factor in explaining the difference between net returns and that MMMFs' relative returns show strong persistence. Christoffersen (2001) uses the MMMF setting to examine fee waving strategies used by funds. To study the performance-flow relation of MMMFs and how it affects decisions to waive fees, Christoffersen (2001) employs Sirri and Tufano's (1998) methodology to estimate a piecewise-linear fund flow function. She finds that better performing funds attract more flows and that variation in fee waivers is significant and relates to the relative performance of MMMFs.

Existing literature on fund family characteristics and strategies is scarce. Massa (1998) develops a model of the mutual fund industry structure that explains the role of fund families. He argues that fund family strategies of segmentation and product proliferation can be used to exploit investors' heterogeneity. Mamaysky and Spiegel (2001) develop a model of mutual fund families that explains the existence of fund families and their strategies to satisfy investors' trading and hedging needs. Nanda, Wang, and Zheng (2004) show that a spillover effect of star performance exists, and that families use the strategy of generating star performers to attract more assets. Gaspar et al. (2006) and Guedj and Papastaikoudi (2003) argue that families provide more support to the better performing and/or higher fee funds to maximize family level proceeds and the family objective function. This strategy of favoritism can be in the form of cross-fund subsidization by shifting performance (Gaspar et al., 2006) or through limited resource allocation across funds (Guedj and Papastaikoudi, 2003). Massa (2003) demonstrates that industry structure matters, showing that fund families compete through performance and product differentiation.

This study finds evidence that fund families and their investors can use family MMMFs as cash centers. Families can use their MMMFs to offset cash transactions of family non-MMMFs and to place cash of other family funds into in-house MMMFs. Family investors can use MMMFs to temporarily park assets by utilizing free asset transfers within the family. Differences in fund characteristics such as maturity, yield, and expenses across MMMFs can be partially explained by family-specific characteristics, including cash management strategies at the family level. Application of these strategies can reduce operating costs and improve overall performance for families and investors.

The remainder of this paper is organized as follows: Section I develops the hypotheses; Section II describes the data; Section III covers empirical analysis; and Section IV concludes. …

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