The Information Content of Mutual Fund Print Advertising

The mutual fund industry has experienced tremendous growth in recent years. During this time period mutual funds have become somewhat of a commodity with many funds using advertising to attract investors. The current study uses content analysis to determine the informational content of fund advertising. The results indicate that while the average number of informational cues increased during the time period 1979 to 1989, there was no significant increase in the information content of mutual fund advertising between 1989 and 1999. Relatively few funds include information such as loads, 12b-1 fees, and expense ratios in their advertisements, and fund ads rarely discuss risk. ********** Mutual funds are financial investments whereby investment companies raise money from shareholders and invest it in stocks, bonds, money market securities, or other investments. Each investor then has a prorata claim to the underlying fund assets based on the relative amount of their investment in the pool. Mutual funds offer investors the advantages of diversification and professional management. While many other consumer financial products such as home mortgages (e.g., Lino 1992), credit cards (e.g., Lee and Hogarth 2000), home equity credit lines (e.g., Salandro and Harrison 1997), and health insurance (e.g., Kolodinsky 1999) have been investigated from a public policy and consumer welfare standpoint, little research has investigated open-end mutual funds (see Lichtenstein, Kaufmann, and Bhagat 1999 for a recent exception). The open-end mutual fund industry can be traced to the 1920s but has only recently experienced rapid growth with mutual funds becoming the investment vehicle of choice for individual investors. At year-end 1999, aggregate mutual fund assets totaled approximately $6.9 trillion, a fourfold increase since 1990, and approximately 83 million individuals and 48 million households owned mutual funds (Investment Company Institute 2000). In 1999, households made net financial asset purchases of $505 billion, of which $327 billion (65%) was in mutual funds (Investment Company Institute 2000). During this growth period, mutual funds have become somewhat of a commodity much like other consumer packaged goods (Brandstrader 1996; Geer 1997; Walbert 1997). As of year-end 1999, there were 5,407 distinct fund portfolios, with 980 portfolios classified as growth portfolios alone. As the number of funds increases and the differences among mutual funds become less obvious, investors are faced with the problem of how to make info rmed purchase decisions. The choice of a specific mutual fund has tremendous consumer welfare implications. For example, consider two funds with one fund earning an 8% gross return compounded annually and the other a 10% gross return compounded annually. The original investment in each fund is $10,000. The accumulated wealth for the fund with an 8% return after 30 years is $74,433.51, while that of the fund with a 10% return is $129,073.30, or a difference of 73.41%. In another example, consider two funds each having a 10% gross return compounded annually. The first fund has an expense ratio of 0.18% and the second an expense ratio of 0.75%. An expense ratio is the amount investors pay for fund administration, management, and distribution. A fund's expense ratio is calculated as a percentage of a fund's net assets and is a recurring expense for investors. Once again, the initial investment in each fund is $10,000. In 30 years, the fund with a 0.18% expense ratio will have an accumulated wealth of $165,313.20, while the fund with the 0.75% expense ratio grows to $139,218.20, a difference of 18.74 percent. Given most mutual fund investments are for retirement purposes and other major life expenses (i.e., college savings) and involve larger investments than the examples above, the choice of a mutual fund can have a significant impact on terminal wealth and consumer welfare. Lichtenstein et al. …