Do Fund Ads Influence Editors?

from the Wealth Management News Service

WMNS -- It’s a demonstrated fact that positive media mentions in newspapers and magazines are associated with significant future inflows into a mutual fund, while advertising expenditures are less likely to influence flows. So why then, one might ask, do mutual fund companies continue to pour money into advertising?

The answer may lie in a study published by Jonathan Reuter and Eric Zitzewitz, finance professors at the University of Oregon and Stanford University respectively. The study revealed a correlation between advertising and fund recommendations in major personal finance magazines. The authors present evidence that personal finance magazines are more likely to recommend the funds of their advertisers, even after controlling for fund characteristics such as expenses, past returns and the overall levels of advertising. They also report that recommendations in these (and other) publications significantly influence investor behavior.

The researchers studied fund recommendations and advertising at major personal finance magazines such as Money, Kiplinger’s Personal Finance, and Smart Money. They found that these publications are more likely to recommend funds from families that have advertised within their pages in the past.

The study suggests, however, that, whether the bias is conscious or unconscious, it does not lead publications to recommend funds with significantly lower future returns than they might have recommended in the absence of any advertising. In selecting funds to recommend, magazines, according to the authors, "overweight past returns relative to expenses. This approach leaves magazines with large numbers of funds with high past returns from which to select, and so bias towards advertisers can be accommodated without significantly reducing readers’ future returns." Interestingly, the study reports that the recommendations of Consumer Reports, which does not accept advertising, have future returns comparable to or below those of the publications which do accept advertising.

The New York Times and The Wall Street Journal were also included in the study, which found little evidence of a similar relationship for mentions in those publications.

The full study can be accessed at:

http://faculty-gsb.stanford.edu/zitzewitz/Research/ads.pdf.