The Impact of Scale in Active Fund Management: Examining Diseconomies of Scale in Actively Managed Mutual Funds Investing in European Equities

Sammanfattning

We empirically investigate the relationship between fund size and performance using a comprehensive sample of actively managed mutual funds investing in European equities. We find statistically significant evidence of decreasing returns to scale in active fund management. As the size of a fund increases, its ability to outperform its corresponding benchmark declines. In addition, we find a statistically significant negative relationship between fund age and benchmark-adjusted performance. Furthermore, we find that both the average benchmark-adjusted gross return and the value-added measure are positive for the funds in our sample, implying that fund managers can generate excess returns. However, these returns are diminished for investors due to fees, resulting in investor returns averaging below those of the funds' benchmarks. Finally, we find that the expense ratio of a fund is an important determinant of the fund's benchmark-adjusted net return, thus challenging the neoclassical model of mutual funds, where fees are deemed negligible as an investment criterion.