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  • 2008
  • Working Paper
  • HBS Working Paper Series

Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice

By: Lauren Cohen and Breno Schmidt
  • Format:Print
  • | Language:English
  • | Pages:45
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Abstract

We explore a new channel for attracting inflows using a unique dataset of corporate 401(k) retirement plans and their mutual fund family trustees. Families secure substantial inflows by being named trustee of a 401(k) plan. This affords the plan sponsor potential influence on the family's portfolio decisions. Consistent with this, we find that family trustees significantly overweight their 401(k) client firm's stock. Trustee overweighting is more pronounced when the conflict of interest of the trustee family is more severe and when other mutual funds are selling the client firm's stock. This overweighting is not explained by superior information. We quantify a potentially large benefit to the 401(k) sponsor firm of having its price propped up by its trustee fund's more severe overweighting. We also estimate the resulting loss to mutual fund investors, which can be large in some cases.

Keywords

Investment Funds; Investment Portfolio; Conflict of Interests; Financial Services Industry

Citation

Cohen, Lauren, and Breno Schmidt. "Attracting Flows by Attracting Big Clients: Conflicts of Interest and Mutual Fund Portfolio Choice." Harvard Business School Working Paper, No. 08-054, January 2008. (Winner of the Barclays Global Investors Best Paper Prize, Asset Allocation Symposium, European Finance Association 2006. Winner of the Society of Quantitative Analysts Award, Best Paper in Quantitative Investments, Western Finance Association 2007.)
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About The Author

Lauren H. Cohen

Finance
→More Publications

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