Size and Performance of Chinese Mutual Funds: The Role of Economy of Scale and Liquidity

Using a detailed stockholding for a comprehensive sample of Chinese open-end equity mutual funds from 2004 to the first half of 2010, we investigated the effect of economy of scale and liquidity on the relationship between fund size and performance. We find that an inverted U-shape relationship exists between fund size and performance as measured by various performance benchmarks. Both economy of scale and liquidity play important roles in Chinese mutual funds. Furthermore, their combined effect explains the inverted U-shape relationship of size and performance reasonably well.

[1]  Jeffrey D. Kubik,et al.  Does Fund Size Erode Mutual Fund Performance ? , 2003 .

[2]  R. Wermers,et al.  Momentum Investment Strategies of Mutual Funds , Performance Persistence , and Survivorship Bias , 1997 .

[3]  K. Tang,et al.  Share reform and the performance of China's listed companies , 2008 .

[4]  O. Williamson.  Corporate Finance and Corporate Governance , 1988 .

[5]  Xuemin Yan,et al.  Liquidity, Investment Style, and the Relation between Fund Size and Fund Performance , 2008, Journal of Financial and Quantitative Analysis.

[6]  Sanford J. Grossman.  On the Impossibility of Informationally Efficient Markets , 1980 .

[7]  Peter Tufano,et al.  Board structure and fee-setting in the U.S. mutual fund industry , 1997 .

[8]  D. Chance,et al.  The Effect of 12b‐1 Plans on Mutual Fund Expense Ratios: A Note , 1987 .

[9]  Joshua D. Coval,et al.  The Geography of Investment: Informed Trading and Asset Prices , 1999, Journal of Political Economy.

[10]  E. Fama,et al.  Risk, Return, and Equilibrium: Empirical Tests , 1973, Journal of Political Economy.

[11]  David A. Latzko.  ECONOMIES OF SCALE IN MUTUAL FUND ADMINISTRATION , 1999 .

[12]  S. Engstrom.  Costly Information, Diversification, and International Mutual Fund Performance , 2003 .

[13]  K. Ruckman.  Expense ratios of North American mutual funds , 2003 .

[14]  D. Malhotra,et al.  AN EMPIRICAL ANALYSIS OF MUTUAL FUND EXPENSES , 1997 .

[15]  Joshua Pollet,et al.  How Does Size Affect Mutual Fund Behavior , 2008 .

[16]  Michael Y. Hu,et al.  Mutual Fund Performance: Does Fund Size Matter? , 1999 .

[17]  The behavior of Taiwan mutual fund investors—performance and fund flows , 2002 .

[18]  S. Agate,et al.  Small is beautiful , 2003, English Today.

[19]  J. Stein,et al.  Information Production and Capital Allocation: Decentralized vs. Hierarchical Firms , 2000 .

[20]  Robert D. Arnott,et al.  Rebalancing a Global Policy Benchmark , 2002 .

[21]  Wilfred L. Dellva,et al.  The relationship between mutual fund fees and expenses and their effects on performance , 1998 .

[22]  Ming Huang,et al.  Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization , 2004 .

[23]  Norman V. Loayza,et al.  Openness Can Be Good for Growth: The Role of Policy Complementarities , 2005 .

[24]  Zhiwu Chen,et al.  Discounts on Illiquid Stocks: Evidence from China , 2001 .

[25]  Andre F. Perold,et al.  The Right Amount of Assets Under Management , 1991 .

[26]  Mark M. Carhart.  On Persistence in Mutual Fund Performance , 1997 .