Effective water management is crucial in anion-exchange membrane fuel cells (AEMFCs) due to water's dual role as a reactant during alkaline oxygen reduction and a product of alkaline hydroxide oxidation. Meanwhile, both hydroxide conduction and water transport in polymer electrolytes are highly dependent on the hydration level. Therefore, a three-dimensional multi-physics model is developed to investigate the critical role of ionic and water transport parameters of the electrolyte on AEMFC performance. Additionally, detailed water distribution analysis is used to reveal its fundamental mechanism. The results reveal that extremely inhomogeneous water distribution and cathode water starvation are the main causes of the poor cell performance. Moreover, increasing membrane water diffusivity, water conversion, and decreasing the electro-osmotic drag coefficient all contribute to better cell performance through improved water balance and cathode water supply. Among these, cell performance is most sensitive to membrane water diffusivity, with a 40 % increase in peak power density when it is increased from 10−10 m2 s−1 to 10−9 m2 s−1. Although high ionic conductivity improves cell performance by directly reducing ohmic impedance, it also results in a more inhomogeneous distribution of water in the whole cell, so that a four-fold increase in ionic conductivity only yields a 62 % increase in peak power density.