Managerial Ability, Risk Preferences and the Incentives for Active Management

Abstract

The opinions in this Working Paper are the sole responsibility of the authors and they do not necessarily coincide with those of the CNMV. The CNMV publishes this Working Paper Series to enhance research and contribute towards greater knowledge of the stock markets and their regulation. The CNMV distributes its reports and publications via the internet at www.cnmv.es © CNMV. The contents of this publication may be reproduced, subject to attribution.

Why Is Investors' Mutual Fund Market Allocation Far from the Optimum?

“…In particular, the switching, search and informational costs that investors face, especially retail investors, deter them from finding the fund that offers the highest utility and allow management companies to enjoy market power irrespective of financial performance. An important consequence is that management companies can set fees that are higher than they would be in a more competitive environment and continue to enjoy market power (Losada, 2016). Therefore, it is plausible to assume that the current investors' optimal portfolio of funds differs from the optimum.…”