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The Journal of Index Investing

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Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice?

Jonathan Handy, Jonathan Ricketts and Thomas Smythe
The Journal of Beta Investment Strategies Spring 2020, 10 (4) 49-58; DOI: https://doi.org/10.3905/jii.2020.1.080
Jonathan Handy
is an assistant professor of finance at Furman University in Greenville, SC
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Jonathan Ricketts
is a research assistant at Furman University in Greenville, SC
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Thomas Smythe
is a professor of finance at Florida Gulf Coast University in Fort Myers, FL
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Abstract

One of the largest changes in the mutual fund industry in the past 25 years has been the introduction of multiple-class mutual funds. This article discusses the history of this development, outlines the basic structure of such funds, and provides a survey of empirical research regarding the structure. Evidence indicates that the Securities and Exchange Commission’s initial concerns regarding multiclass funds were warranted, as the majority of empirical evidence suggests that multiclass funds are fraught with agency problems. Investors and advisors must understand the nuances of multiclass funds when investing, because evidence indicates that the expenses associated with such funds are substantial, and these funds may have lower-quality governance.

TOPICS: Financial crises and financial market history, mutual fund performance

Key Findings

  • • This article surveys existing literature on multiple-class mutual funds to inform professional advisers and investors of existing agency problems. Ultimately, the article aims to promote investor protection regarding the structure.

  • • This article documents that multiple-class mutual funds expose investors to higher expenses than single-class mutual funds while potentially having lower governance quality.

  • • This article details the role the Securities and Exchange Commission played in establishing multiple-class mutual funds (via rule 18f-3) and summarizes concerns that the Commission initially had regarding the structure.

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The Journal of Index Investing: 10 (4)
The Journal of Beta Investment Strategies
Vol. 10, Issue 4
Spring 2020
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Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice?
Jonathan Handy, Jonathan Ricketts, Thomas Smythe
The Journal of Beta Investment Strategies Feb 2020, 10 (4) 49-58; DOI: 10.3905/jii.2020.1.080

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Analyzing the Evidence: Are Multiclass Mutual Funds the Right Choice?
Jonathan Handy, Jonathan Ricketts, Thomas Smythe
The Journal of Beta Investment Strategies Feb 2020, 10 (4) 49-58; DOI: 10.3905/jii.2020.1.080
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  • Article
    • Abstract
    • A BASIC HISTORY AND OVERVIEW OF MULTICLASS MUTUAL FUNDS
    • THE ROLE OF THE SEC IN THE MULTICLASS MUTUAL FUND INDUSTRY
    • INHERENT PRINCIPAL-AGENT PROBLEMS WITHIN THE MULTICLASS STRUCTURE
    • EMPIRICAL EVIDENCE SURROUNDING MULTICLASS MUTUAL FUNDS
    • CONCLUDING REMARKS REGARDING MULTICLASS FUNDS
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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