Should investors choose funds from focused families?

Abstract

This paper finds evidence consistent with a separating equilibrium where high search cost investors choose mutual fund families that offer a broad product array, while low search cost investors find it most efficient to allocate their resources across families focused in a particular product line. Considering both security research and distribution efficiencies, we find that focused families offer investors about a 50 basis point annual advantage in domestic equity funds over our period of study. Innovations in distribution, such as fund supermarkets, as well as financial advice priced below the breakeven threshold, can lever the benefits of family focus.