What Drives Market Share in the Mutual Fund Industry?*

This article examines competition and investor behavior in the mutual fund industry for the universe of US mutual funds during 1976--2009. Over this period, industry assets increased by a factor of 200, the number of active fund families quadrupled, and the average market share of a family declined by four-fifths. We find that price competition and product differentiation are both effective strategies in obtaining market share. Families that pass along economies of scale to investors and those that charge lower fees than the competition gain market share, but only if these fees are above average to begin with. Loads and 12b-1 fees, however, have a positive effect on market share, consistent with the use of these types of fees for marketing and distribution. Families that perform better, offer a wider range of products, and start more funds relative to the competition (a measure of innovation) also have a higher market share. Innovation is rewarded more if the new fund is more differentiated from existing offerings. Overall, our evidence suggests that mutual fund families compete effectively along both price and non-price dimensions. Copyright 2011, Oxford University Press.