Product differentiation in the socially responsible mutual fund industry

In this study, we analyse the effect of product differentiation on prices and client attraction in the socially responsible (SR) mutual fund industry. Using three proxies for differentiation, including a text-based indicator, a return-based indicator, and a portfolio-holding indicator, we analyse a sample of US SR equity mutual funds in the period 1999-2019. Our findings show that the text differentiation measure better explains the product differentiation impact on prices and flows than the measures based on fund characteristics. Our text differentiation results indicate that younger SR funds and funds belonging to smaller families are more differentiated. In addition, differentiation allows SR funds to charge higher fees and attract more money flows. Finally, our results indicate that SR fund investors are sensitive to differentiation regarding other funds implementing the same SR strategies, but not in relation to other funds in the same Morningstar financial style category.

Automated summary

This study analyzes the impact of product differentiation on prices and client attraction in the socially responsible mutual fund industry. The findings suggest that text differentiation measure better explains the product differentiation impact on prices and flows. Younger SR funds and funds belonging to smaller families are more differentiated, which allows them to charge higher fees and attract more money flows. SR fund investors are sensitive to differentiation regarding other funds implementing the same SR strategies, but not in relation to other funds in the same Morningstar financial style category.