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The empirical relationship between mutual fund size and operational efficiency

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  • Stephen Zera
  • Jeff Madura

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.

Suggested Citation

  • Stephen Zera & Jeff Madura, 2001. "The empirical relationship between mutual fund size and operational efficiency," Applied Financial Economics, Taylor & Francis Journals, vol. 11(3), pages 243-251.
    • Handle: RePEc:taf:apfiec:v:11:y:2001:i:3:p:243-251
    DOI: 10.1080/096031001300138636
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    Cited by:

    1. Romana Bangash & Arif Hussain & Muhammad Hassan Azhar, 2018. "Performance Evaluation of Mutual Funds: A Data Envelopment Analysis," Global Social Sciences Review, Humanity Only, vol. 3(2), pages 215-240, June.
    2. Carlos F. Alves & Victor Mendes, 2006. "Are mutual fund investors in jail?," FEP Working Papers 203, Universidade do Porto, Faculdade de Economia do Porto.
    3. Geranio, Manuela & Zanotti, Giovanna, 2005. "Can mutual funds characteristics explain fees?," Journal of Multinational Financial Management, Elsevier, vol. 15(4-5), pages 354-376, October.
    4. Juan Carlos Matallin-Saez, 2011. "On causality in the size-efficiency relationship: the effect of investor cash flows on the mutual fund industry," Applied Economics, Taylor & Francis Journals, vol. 43(27), pages 4069-4079.
    5. Laurent Bodson & Laurent Cavenaile & Danielle Sougné, 2011. "Does size affect mutual fund performance? A general approach," Journal of Asset Management, Palgrave Macmillan, vol. 12(3), pages 163-171, August.

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