The empirical relationship between mutual fund size and operational efficiency

Abstract

For shareholders of a mutual fund, the expense percentage represents the only factor whose daily effect on the change in the value of their portfolio is known in advance. Expense percentages may be used in an assessment of the variation in efficiency levels across various mutual fund size groupings when either individual mutual funds or mutual fund families are used as the unit of investigation. The study reveals that the elasticity of fund expenses with respect to fund size does not differ across individual mutual fund size categories. Corroborating evidence of a stable elasticity was found when the dollar size of fund families was utilized as the base unit of analysis. Additional corroboration was found in the analysis of fund-specific expense-size elasticities, where variation in fund-specific elasticities was not explained by fund size. However, mutual fund expense-size elasticities are shown to differ in a statistically significant manner across mutual fund investment objective categories. For shareholders of a mutual fund, the expense percentage represents the only factor whose daily effect on the change in the value of their portfolio is known in advance. Expense percentages may be used in an assessment of the variation in efficiency levels across various mutual fund size groupings when either individual mutual funds or mutual fund families are used as the unit of investigation. The study reveals that the elasticity of fund expenses with respect to fund size does not differ across individual mutual fund size categories. Corroborating evidence of a stable elasticity was found when the dollar size of fund families was utilized as the base unit of analysis. Additional corroboration was found in the analysis of fund-specific expense-size elasticities, where variation in fund-specific elasticities was not explained by fund size. However, mutual fund expense-size elasticities are shown to differ in a statistically significant manner across mutual fund investment objective categories.