Affiliated Mutual Funds: Beyond the Reach of the Invisible Hand?

In many countries, banks are the primary distribution channel for mutual funds and predominantly sell products issued by their own asset management divisions (“affiliated funds”). We examine how this lack of competition affects managerial activeness, fund performance, and investor outcomes. Using a comprehensive sample of German equity mutual funds from 2010 to 2024, we find that, all else equal, the probability of being a closet indexer—a fund marketed as actively managed but instead closely tracking its benchmark—is about 10 percentage points higher for affiliated funds, relative to a sample mean of 22%. Moreover, bank affiliation is a significant determinant of the underperformance of closet indexers. Flow analyses show that investors in affiliated funds display pronounced inertia, implying that underperformance translates into tangible welfare losses. Our findings highlight how exclusive distribution channels weaken competition and reduce investor protection in retail fund markets.