Fund Size, Transaction Costs and Performance: Size Matters!

Abstract

Recent studies find evidence that small funds outperform large funds. This fund size effect is commonly hypothesized to be caused by transaction costs. Due to the lack of transactions data, prior studies have investigated the transaction costs theory indirectly. Our study, however, analyses the daily transactions of active Australian equity managers and finds aggregate market impact costs incurred by large managers are significantly greater than those incurred by small managers. Furthermore, we show large managers exhibit preferences for trade package formation and portfolio characteristics consistent with transaction cost intimidation. We analyse the interaction between transaction cost intimidation and the fund size effect, and document that large managers pursuing a highly active trading strategy suffer more from fund size, than large funds following a more passive strategy. This suggests the fund size effect is related to transaction costs, as trading activity is a good proxy for expected market impact. Finally, based on a simulation experiment, we find that transaction cost intimidation is at least as important as the increase in market impact costs due to fund size.

Determinants of Pension Fund Efficiency in Kenya: An Exploratory Study

“…65 These diseconomies result from excessive administration costs incurred in communicating with the members, fund administration and regulatory levies. 66 According to Odundo (2008) and Nyakundi (2009), one of the issues that contribute to the inefffijiciency of the National Social Security Fund in Kenya is the estimated membership of 800,000 members who are dispersed across the country. This increases the costs associated with the administration of members' accounts and record keeping.…”

Evaluating fund capacity: issues and methods

“…Chen et al (2004), Yan (2008), Chan et al (2009) andVidal-Garcia (2016) find that smaller funds outperform larger funds and provide evidence that the relation is strongest for funds with greater demand for liquidity due to aspects such as focusing on small caps, less liquid securities or their investment or trading style. Fung et al (2008) document that fund flows act to reduce alpha for hedge funds.…”

“…For example, Chan et al (2009) find that larger fund size is associated with more securities, less small stocks, lower bet sizes and less trading. Grinblatt and Titman (1989) and Christoffersen et al (2007) provide evidence that larger funds incur lower transaction costs, and Elton et al (2012) find that larger funds have lower expense ratios.…”

Effect of fund size on the performance of Australian superannuation funds

“…Previous research suggests that there are diseconomies of scale for mutual funds that invest entirely in listed equity securities (see Beckers and Vaughan, ; Chen et al ., ; Yan, ; Chan et al ., ) . These studies find that scale erodes the performance of equity funds, because of the market‐impact costs and execution delays associated with large trades in equity markets and the loss of flexibility in implementing stock‐selection ideas .…”