The Economics of Mutual Fund Markets: Competition Versus by William J. Baumol

By William J. Baumol

The unique impetus for this learn used to be supplied a number of years in the past through a request to aid tips for constancy administration and examine company in studying the mutual fund undefined, with specific emphasis on cash industry mutual money. We have been requested to concentration our efforts at the mechanism through which the advisory charges of mutual cash are made up our minds. This request arose out of litigation that challenged the extent of advisory charges charged to the shareholders of the constancy funds Reserve Fund. as a consequence, we have been requested to supply comparable tips to guidance for T. Rowe expense affiliates concerning the charges charged to shareholders in their leading Reserve Fund. 1940, advisers of below the funding corporation Act of mutual cash have a fiduciary responsibility with recognize to the extent of charges they might cost a fund's shareholders. because the passage of the funding corporation Act, there were a variety of court cases introduced through shareholders alleging that advisory charges have been over the top. In those proceedings, the courts have didn't supply a collection of criteria for identifying whilst such charges are over the top. as a substitute, they've got depended on arbitrary and regularly ill-defined standards for jUdging the reasonableness of charges. This failure to use economic-based assessments for comparing the price constitution of mutual money supplied the inducement for the current booklet, which undertakes a entire research of the economics of the mutual fund industry.

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Extra resources for The Economics of Mutual Fund Markets: Competition Versus Regulation

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46 History of the Development of the Mutual Fund Industry costs associated with mutual fund transactions, which is a critical factor in increasing investor mobility. CONCLUSIONS Mutual funds have evolved as a reaction to market conditions. This evolution was particularly clear in the case of MMFs, but is true more generally as well. The growth of mutual fund complexes that provide several funds with different objectives under one corporate umbrella has provided investors a wide variety of investment opportunities.

In 1924, the first major closed-end and open-end companies were formed. Dillon, Read & Co. S. S. & Foreign). Massachusetts Investors Trust (MIT) was the first open-end, or mutual fund, company. By the end of 1924, MIT had 200 shareholders holding 32,296 shares with a total asset value of $392,000. Over the next three years, 56 new closed-end funds and 13 new open-end funds were started. However, the industry was still small and concentrated by today's standards. Before the stock market crash in 1929, closed-end funds dominated the industry.

TWO REGULATION OF THE MUTUAL FUND INDUSTRY BACKGROUND One of the primary objectives of the Investment Company Act of 1940 was to protect small investors in mutual funds against abuses by a fund's adviser. Proponents of mutual fund regulation believed that, because of the inability of investors to replace a fund's adviser with a new adviser should the adviser charge excessive fees or otherwise take advantage of a fund's shareholders, the usual bargaining that is part of the competitive process is absent from the adviser-shareholder relationship.

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