The effect of fund size on mutual funds performance in Egypt – Future Business Journal

The basic aim behind the mutual funds is to create a pool of money from individuals and organizations to invest in stocks, bonds and other assets in different industry sectors and regions of the world, the money collected from investor’s is invested by the fund manager in different types of securities depending upon the objective and need of the investor based on the preferred risk and return.

Ferreira et al. [13] this research examined the determinants of the mutual funds’ performance around the world by using a sample of 10,568 open-ended actively managed equity funds from 19 countries in the 1999–2005 period. researchers measured the performance of the mutual funds by a list of fund attributes including size, age, fees, management structure and management tenure, in addition country characteristics such as economic development, financial development, investor protection and familiarity. The researchers concluded that funds size is positively related with fund performance.

Larger funds perform better suggesting the presence of significant economies of scale in the mutual fund industry worldwide. The fund age is negatively related with fund performance indicating that younger funds tend to perform better, additional tests show that fees are positively associated with performance. If fees are seen as the price that uninformed investors pay to managers to invest their money, when paying higher fees investors are paying the benefits associated to that investment and obtain better performance. Mutual funds managed by an individual manager perform better. The possible benefits associated with team-management funds are exceeded by the costs.

Management tenure is positively linked to performance. This finding supported the hypothesis that the benefits of management experience outweigh the costs, such as lack of effort and attention. Domicile country characteristics are able to explain mutual fund performance beyond fund attributes. There is a positive relation between mutual fund performance and the country’s level of financial development, countries with high trading activity and low transaction costs. The level of economic development is of importance for domestic funds. Funds located in countries with strong legal institutions tend to perform better. They concluded that the home trading, legal, and knowledge environment are important in explaining performance worldwide.

Minhas [24] the purpose of the study was to evaluate the factors that affect the mutual funds’ performance in Pakistan. The author conducted his analysis on 30 open-ended mutual funds operating in Pakistan for the period from 2007 to 2014. The author used the regression analysis model to identify the impact of expenses, fund size, management style and liquidity on the mutual funds’ performance. The results showed that expenses are the most significant variable that can impact the fund performance, while the size, management style and liquidity showed a very low significant.

Soeharto and Kisti [32] this research examined recent past performance and fund characteristics that affect the equity mutual fund performance, performance was measured by Jensen Alpha. The characteristics examined include Fund Size, Fund Age, Net Asset Value, and Fund Growth. This research used 33 mutual funds equity as a sample during 2010–2013. The hypotheses were tested using panel data regression with Fixed Effect Model. The results indicated past performance, Fund Size has negative effect to equity fund performance and Fund Growth have positive effect to equity fund performance. The findings also find same thing show that Fund Age have positive effect to equity fund performance. However, Net Asset Value was found have no significant influence on equity fund performance. In term of that, Net Asset Value is not a good predictor of future performance. Fund managers should understand the characteristics that will affect fund performance and develop strategies on how to increase their funds’ performance.

Ramesh and Dhume [28] the paper aim was to establish a relationship between fund size and its performance. The attempt is also made to incorporate all the fund attributes and evaluate if these attributes have any favorable or adverse impact on the performance of the mutual funds. The study considers five fund characteristics. These are fund size, fund flow, expense ratio, portfolio turnover rate and fund age. Cross-sectional multiple regression approach is used to analyze the impact of the fund characteristics on the performance of the funds. The results indicated that, fund size and fund flow were inversely related with the returns earned on the fund. Increase in the fund inflow erodes the performance of the mutual funds. Expense ratio and portfolio turnover rate were highly correlated with each other. Increase in portfolio turnover rate increases the expense ratio indicating that, higher trading activity will incur higher costs. Fund performance was significantly related to the size of the fund and the new money flowing into the fund every year.

Rehman and Baloch [29] the study aimed to know the impact of factors affecting the performance of Mutual Funds in Pakistan. The study investigated the performance of 44 open-ended Mutual Funds operating in Pakistan for the period from 2010 to 2014. The dependent variable of the study was the fund returns, and the independent variables were fund size, expense ratio, asset turnover, liquidity and load fee. The results showed that the size, expense ratio and asset turnover have positive impact on fund return. And factors like liquidity and load fee are showing negative impact on fund return. The research advised fund managers to maintain a balance among the factors to ensure maximization of its return, benefiting both; Mutual Fund managers and investors.

Moore [25] in this paper, the author attempted to answer the question of whether or not there is a significant relationship between age and performance for actively managed equity mutual funds. Many investors require a multi-year track record before investing in a fund, which could be costly if new funds perform better than established funds. I investigate this question using performance information and fund characteristics (expense ratio, fund size, age, and manager tenure) from the CRSP database for all Morningstar U.S. equity funds between 1990 and 2015. This paper concluded that older funds are riskier, but this relationship reverses for very young funds, which exhibit more risk. The author found that older funds have slightly lower risk-adjusted returns, but this relationship again reverses for very young funds. Though both of these relationships are somewhat weak, results implied that investors may not want to flock to new funds in the hope of outsized risk-adjusted returns requiring a track record does not come at a significant cost and may, in fact, help investors avoid risk.

Asad and Siddiqui [7] the authors of this research were to determine the factors that impact the returns and performance of mutual funds of Pakistan. To determine this they selected 100 mutual funds of 9 different categories from Pakistan mutual fund market, it included conventional and Islamic both. To find the impact they include both micro factors (Expense ratio, Fund age, Fund size, Risk return coefficient, Standard deviation, Sharp ratio) and macro factors (GDP, Interest rate). This research concluded that fund age, fund size and risk return coefficient have no effect on mutual fund return and performance, however, in some model’s risk return coefficient have negative effect on fund return and performance, strong positive relation has been found for factors expense ratio and risk (i.e., standard deviation), however, Islamic funds show the negative effect of expense ratio to Islamic mutual fund return and performance.

Alvi and Rehan [4] this research evaluated the potential mutual fund performance drivers and will benefit the stakeholders in terms of smart investment decisions. The study is based on convenient sampling method covering 16 out of 19 asset management companies (AMCs) that comprise 114 outstanding funds in the Mutual Fund Association of Pakistan (MUFAP). The findings revealed that the asset under management, fund risk, KSE-100 returns, total income, total expense, age of the fund and lagged returns have a significant positive impact. Management quality rating has an insignificant positive impact on returns. In contrast, risk-free instruments have a significant negative impact on fund returns (FRs).

Previous studies showed that some authors found a significant inverse relation between fund size and fund performance, fund size negatively impact over the performance [17, 28, 32]. On the other hand, some authors found a significant positive relationship between fund size and performance, fund size directly and positively affect the performance of mutual funds, such as [6, 9, 13, 34]. Others found that the fund size has no linear correlation with mutual funds’ performance [1, 8, 12, 21, 24, 31]. Due to conflict in findings this study aims to investigate the effect of fund size on mutual fund performance in Egypt.

Mutual fund performance

Maheswari and Dineshkumar [22], performance is how a firm effectively and efficiently the manager or the investor is in achieving the objectives in terms of return and risk, these objectives include growth funds seek high rates of return from capital gains undertake significant risks in order to earn this gain. Income funds seek both cash dividend income and, capital gains and, as a result, are less risky than growth funds. Income and growth funds want to earn primarily cash dividends and, to a smaller extent, capital gains. Balanced funds claim to be in pursuit of income, growth and stability.

Mutual fund performance can be analyzed through performance measurement ratios which are used in portfolio analysis George and Wayne [14], there are several models which are used for the performance evaluation of mutual funds. Most of the studies used five measures of performance evaluation of mutual funds [1, 26, 33] Sharpe measure; Jensen differential measure; Treynor measure; Sortino measure and Information measure. While Treynor measures only the systematic risk summarized by beta, Sharpe concentrates on total risk of the mutual fund.

The researcher defines mutual funds’ performance as the determination of the success of the portfolio manager to achieve balance between the different rates of return and acceptable levels of risk. Thus, evaluating the performance of mutual funds does not mean only measure return on these funds, but also means measuring the levels of risk associated with those returns during a certain time.

Fund size

The total amounts of subscription of the unit holders in the fund in addition to the total loans payable by the fund. Johansson and Jacobsson [20] Small funds experience higher transaction costs than larger funds because they cannot take advantage of certain economies of scale. Younger funds may face significant higher costs in their start-up period. This is due not only to marketing costs but also the initial cash flows as it will place a greater load on the fund’s transaction costs. One of the reasons of underperformance of younger funds, according to Bauer et al. [9], is their exposure to higher market risk since they are invested in fewer stocks.

Economies of scale provide cost reductions obtained from increasing asset size. Costs per unit of output decrease with increasing scale and constant variable costs as fixed costs are spread over more units of output. Operational efficiency is also often higher, with increasing scale leading to lower variable costs. In the case of mutual funds, there are fixed costs that go toward reducing the ratio of fund expenses Malhotra et al. [23].

The researcher defines fund size as the amount of money that a fund managers manage. Large funds have a benefit over small funds in term of economies of scale because large funds purchase balk of orders so they can pay fixed cost and have access to more resources. Moreover, managers of large funds will have better investment opportunities than managers of small funds and reduced brokerage commission with the amount of the transaction Malhotra et al. [23].

Fund expense

Investors willing to invest in mutual funds, as in any other transaction, must pay fees and incur cost associated with buying and selling, managing the accounts, and just simply gathering the information Alves [3]. Depending on their preferences investors can choose the fee structure that they find more suitable for them. These expenses include fund management fee, expenses incurred on selling and marketing, fees paid to the registrar and transfer agent and other expenses, agent commission, promotional expenses, and other costs that the mutual fund’s manager charges from investors. Fund manager is the ultimate decision maker and his point of view cost a lot depending on years of experience Minhas [24]. The higher the expense ratio the more it affects the investor directly. As fund performance increases, it attracts many financial investors.

The costs involved with purchasing a mutual fund are not always as straightforward as buying a share of stock. To buy stock, you simply pay your broker the agreed upon commission. Mutual funds may also involve a broker fee, but since these are professionally managed funds, there are other expenses involved. The fees involved vary widely across the range of mutual funds. Mutual fund fees broken down into two categories ongoing annual fees to keep you invested in the fund, and transaction fees paid when you buy or sell shares in a fund Wermers [36].

The researcher defines the fund expense as a charged price or fee for the services there are two types of fees incurred by investors’ sales load which consist of load fund and no-load fund. Load fund it’s a mutual fund with an upfront sales or commission charge that the investor must pay. While no-fund load is a mutual fund that doesn’t charge upfront sales or commission. Fund operating expense it’s a one type of upfront load charges on the initial investment in a mutual fund.

Fund age

Age of a mutual fund could play a role in deciding performance since younger funds may face significant higher costs in their start-up period due to diseconomies of scale, but also that the initial cash flows will have a greater weight on the fund’s transaction costs. There is also evidence showing that “return of new mutual funds may be affected by an investment learning period” Gregory et al. [16].

According to Bauer et al. [9] one of the reasons for underperformance of younger funds is their exposure to higher market risk since they are invested in fewer stocks. Young funds tend to be smaller than older ones, which make the young funds’ returns and ratings more prone for manipulation. The smaller the fund, the more a handful of stock picks can impact the performance of the entire fund Adkisson and Fraser [2].

Fund type

According to [35] mutual funds fall into several main categories. Some are bond funds (also called fixed income funds), and some are stock funds (also called equity funds). There are also funds that invest in a combination of these categories, such as balanced. In addition, there are money market funds, which are a specific type of mutual fund, Global/International funds, Regional funds, Sector funds, Islamic funds, Funds of funds, Asset allocator funds and Private equity funds.

The researcher defines the fund type as a short-term funds and long-term funds. Long-term funds include equity funds consisting of common and preferred stocks securities, bond funds consisting of fixed income capital market debt securities, hybrid funds consisting of both stocks and bond securities, index fund are long-term mutual funds in fund managers buy securities in proportions similar to those included in a specified major stock index. Finally, exchange-traded funds are designed to replicate a particular stock market index. However, unlike index funds, exchange traded funds are traded on a stock exchange at prices that are determined by the market.

Short-term funds include money market mutual funds which are a collection of short term to provide easy liquidity, preservation of capital and moderate income. Investors invest in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper, investors earn interest at a rate faintly higher than commercial bank accounts.