Mutual Fund Size Research Articles

The Size Of Mutual Funds And Risk-Adjusted Performance: Some New Evidence

This paper provides recent evidence regarding the relationship between mutual fund size and risk-adjusted performance. A sample of 64 no-load funds was grouped into four size quartiles based on the total assets under administration at the beginning of each year for the 1970-1984 period. Standard measures of portfolio performance were then computed for each quartile. Consistent with a size effect, the results of this study provide some evidence of higher returns for smaller mutual funds. However, the abnormal returns are not statistically significant when performance is evaluated using Jensens Index.

Does size affect mutual fund performance? A general approach

In this article, we study the potential relationship between mutual fund size and performance in a general framework. We sequentially test for a linear and a quadratic relationship using several traditional performance measures, as well as a new measure, on the basis of multi-factor models. We find evidence of a concave quadratic relationship between mutual-fund performance and size, which implies the existence of an optimal medium size in terms of performance.

Australian Equity Mutual Fund Size Effects

Australian Equity Mutual Fund Size Effects

Empirical study of the tails of mutual fund size

The mutual fund industry manages about a quarter of the assets in the U.S. stock market and thus plays an important role in the U.S. economy. The question of how much control is concentrated in the hands of the largest players is best quantitatively discussed in terms of the tail behavior of the mutual fund size distribution. We study the distribution empirically and show that the tail is much better described by a log-normal than a power law, indicating less concentration than, for example, personal income. The results are highly statistically significant and are consistent across fifteen years. This contradicts a recent theory concerning the origin of the power law tails of the trading volume distribution. Based on the analysis in a companion paper, the log-normality is to be expected, and indicates that the distribution of mutual funds remains perpetually out of equilibrium.

An Empirical Study of the Tails of Mutual Fund Size

The mutual fund industry manages about a quarter of the assets in the U.S. stock market and thus plays an important role in the U.S. economy. The question of how much control is concentrated in the hands of the largest players is best quantitatively discussed in terms of the tail behavior of the mutual fund size distribution. We study the distribution empirically and show that the tail is much better described by a log-normal than a power law, indicating less concentration than, for example, personal income. The results are highly statistically significant and are consistent across fifteen years. This contradicts a recent theory concerning the origin of the power law tails of the trading volume distribution. Based on the analysis in a companion paper, the log-normality is to be expected, and indicates that the distribution of mutual funds remains perpetually out of equilibrium.

Australian equity mutual fund size effects

AbstractBerk and Green propose a model of a superannuation fund industry, with a limited population of superior fund managers and a competitive investor market. In this market, superior fund managers capture the value they generate, leaving investors with a normal return on their investment. Furthermore, it is argued that previous period returns, age of the fund and management costs explain variation in net cash flow paid into a fund over time. The Berk and Green predictions find some support in empirical tests, reported in the present paper, based on Australian Morningstar retail and wholesale equity fund data over the period 1995–2005.

Australian Equity Mutual Fund Size Effects

The relative performance of small versus large funds has generated some interest in the literature yet there is little empirical evidence to support the existence of superior small fund performance relative to large fund performance. Berk and Green (2004) provide one explanation. They argue that, with a limited population of superior fund managers and a competitive investor market, the superior fund managers capture the value they generate while the funds pay a normal return to their investors. Empirical tests in this paper generally support the Berk and Green (2004) arguments. In particular, tests using Australian Morningstar retail and wholesale equity fund data from 1995 to 2005 identify a positive correlation between previous period returns and asset growth and a negative correlation between asset growth and fund age.

Theory of Mutual Funds: The Effect of Principal Agency Conflicts on Mutual Fund Size

Many textbooks present mutual funds as financial institutions that collect money and trade various financial securities on behalf of their investors who benefit from professional management, effective diversification and high liquidity with relatively low minimum investment requirements. Mutual funds employ professional managers to trade the securities and make use of various distribution channels such as banks, brokers, insurance companies and independent financial consultants to sell the fund's shares to investors. The fund managers and distributors are essentially contracted as agents of the funds' shareholders in that they are paid to help investors to carry out their optimum investment strategies.

The empirical relationship between mutual fund size and operational efficiency

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.

Returns-Chasing Behavior, Mutual Funds, and Beta's Death

I develop an agency model where returns-chasing behavior by mutual fund investors causes beta not to be priced to the degree predicted by the standard CAPM. Mutual fund investors chase returns through time, precipitating unusually large aggregate cash inflows into mutual funds just after dramatic market runups. Mutual fund investors also chase returns cross-sectionally across funds so that the highest-performing funds capture the largest fraction of the aggregate inflows into the mutu al fund sector. The interaction of these two flow-performance relationships induces an asymmetry in payoffs to mutual funds where fund managers care most about outperforming peers during bull markets. Since high-beta stocks tend to outperform in up markets, active fund managers tilt their portfolios toward high-beta stocks, reducing the beta risk premium in equilibrium. To support the model's time-series flow-performance assumption, I show empirically that market returns have a large economic impact on subsequent aggregate mutual fund flows. In addition, data on mutual fund holdings suggest that the aggregate stock portfolio held by equity funds is overweighted in high-beta stocks relative to the overall market, though this does not include the cash held by mutual funds. Fama-MacBeth tests indicate that the equity premium falls only slightly as the relative size of mutual funds increases, and the relation is not statistically significant.