The determinants of mutual fund fees: International evidence

© 2022 Published by VŠB-TU Os a a. All igh s ese ed. ER-CEREI, Volume 25: 105–112 (2022). ISSN 1212-3951 (P in ), 1805-9481 (Online) The de e minan s o mu ual und ees: In e na- ional e idence Li ia Mendes CARNEIROa * a Depa men o Economics and Managemen , Uni e si y o Pa ia, Via S. Felice Al Monas e o 5, 27100 Pa ia, I aly. Abs ac The equi y und indus y has g own apidly o e he pas decades. The ees a e one o he ac o s ha ema kably a ec he low o unds in his indus y. This pape in es iga es he key de e minan s o ac i e unds’ o al ex- pense a ios (TERs) ac oss 32 coun ies be ween 2002 and 2018. The esul s indica e ha la ge unds and man- agemen companies cha ge lowe ees, while in e na ional unds ha e highe TERs. Bu , he highe he mu ual und indus y’s concen a ion is he lowe he ac i e unds’ ees. My ou comes also e eal ha unds pas pe o - mances nega i ely impac he TERs cha ged by ac i e equi y unds and less ac i e unds ha e highe ees. These esul s may sugges ha in es o s ha e he e ogeneous p e e ences o se ices o e en he exis ence o in es o s wi h dis inc pe o mance sensi i i ies. Keywo ds Asse managemen , equi y unds, ac i e managemen , und ees. JEL Classi ica ion: G11, G14, G15. * li ia.mendesca nei o01@uni e si adipa ia.i 106 Ekonomická e ue – Cen al Eu opean Re iew o Economic Issue 25, 2022 The de e minan s o mu ual und ees: In e na- ional e idence Li ia Mendes CARNEIRO 1. In oduc ion The equi y und indus y has expanded s eadily o e he pas ew decades. Despi e he con ac ion su e ed by he sec o du ing he 2007-2008 global inancial c i- sis, he eco e y was accele a ed, wi h he o al olume o asse s unde managemen in equi y unds a ound he wo ld ising om US$10.9 illion in Decembe 2011 o US$28.3 illion in Decembe 2020 (In es men Company Ins i u e, 2021). No e en he impac o he COVID-19 pandemic on inancial ma ke s du ing 2020 was able o p e en he indus y om g owing. The o- al olume o asse s unde managemen inc eased abou 15.5% be ween he end o 2019 and he end o 2020. In he Uni ed S a es, he asse s unde managemen g ow h b ough economies o scale and mo e compe i ion o he equi y und indus y. Consequen ly, he a e age o- al expense a io o ac i e equi y mu ual unds has allen om 1.08 pe cen in 1996 o 0.71 pe cen in 2020 (In es men Company Ins i u e, 2021). Howe e , his sha p educ ion in ees was no obse ed in all coun ies a ound he wo ld. O e he pas ew decades, a g owing body o li e - a u e has explo ed he ela i e alue o ac i e manage- men . Some s udies did no ind e idence ha ac i e unds can gene a e excess e u ns (Ca ha , 1997; Fama and F ench, 2010; Jensen, 1968; Malkiel, 1995), while o he pape s ha e iden i ied ha he bene i s o collec - ing in o ma ion a e a leas equal o i s cos s (Kacpe - czyk and Se u, 2007; We me s, 2000). Recen ly, many pape s ha e s a ed explo ing he cha ac e is ics o he equi y und indus y mo e b oadly. Kho ana, Se aes and Tu ano (2005) ound e idence ha coun ies wi h s onge laws and egula ions ha e a la ge und indus- y. Pás o , S ambaugh and Taylo (2015) no ed ha a und’s abili y o ou pe o m benchma ks dec eases as he size o he und indus y inc eases. Besides, he e has been a g owing numbe o s udies in ecen yea s explo ing he possible impac s in he in- es men und indus y a ising om he emendous g ow h o passi e in es men s (Ben-Da id, F anzoni and Moussawi, 2018; Ca nei o, Eid Junio and Yoshinaga, 2021; C eme s e al., 2016). Despi e he e- cen ad ancemen in he li e a u e on he equi y unds indus y, he e is s ill li le e idence on he aspec s de- e mining he wide a ia ion in managemen ees ha exis s in his indus y. Ho acsu and Sy e son (2004) was one o he i s wo ks o in es iga e he easons be- hind he as numbe o unds and he conside able dis- pe sion o ees in S&P 500 index unds, whe e all unds a e cha ac e ized by a simila e u n pa e n. The au- ho s iden i ied he p esence o ex a-po olio mecha- nisms ha explain his wide a ia ion o ees, such as nonpo olio di e en ia ion and in o ma ion ic ions. Howe e , Choi, Laibson and Mad ian (2014), using an expe imen wi h S&P 500 index unds, ound ha indi- idual in es o s ail o minimize ees and nonpo olio se ice di e en ia ion is no behind hese nonop imal po olio decisions. Adams, Mansi and Nishikawa (2012) also explo ed he compe i ion in he US open-ended equi y index unds ma ke and a gued ha disp opo iona ely high ees a e p e alen in unds wi h mul iple sha e classes and hose wi h weak go e nance s uc u es. Mean- while, Coa es and Hubba d (2007) p o ided e idence ha mu ual und in es o s a e sensi i e o ees. The li - e a u e on unds’ ees ou side he Uni ed S a es is e en a e . Ge anio and Zano i (2005) in es iga ed ees in he I alian und indus y, inding e idence ha la ge unds, la ge und manage s and unds domiciled ab oad cha ge lowe cos s. Kho ana, Se aes and Tu- ano (2008) analyzed he ees cha ged by di e en clas- ses o mu ual unds o e ed o sale in 18 coun ies in 2002, iden i ying ha la ge unds and unds om coun ies wi h g ea e in es o p o ec ion cha ge lowe ees, while ees a e highe o in e na ional unds and o sho e unds. This pape con ibu es o he li e a u e on he com- pe i ion in he open-ended ac i e equi y unds indus y by in es iga ing he key de e minan s o unds’ o al ex- pense a ios (TERs) ac oss 32 coun ies be ween 2002 and 2018. To es his hypo hesis, his wo k u ilizes da a collec ed om he Reu e s-Lippe pla o m o open- end ac i e equi y mu ual unds. This pape adds o he li e a u e by s udying di e en coun ies in an ex en- si e ime window and by b inging new cha ac e is ics ha can a ec he ees cha ged by ac i ely managed equi y unds, such as he unds’ ac i e sha e. In his sense, his s udy in es iga es whe he he und’s ac i - i y sha e a ec s i s managemen ees. The a ional in- ui ion would be ha mo e ac i e unds cha ge mo e because hey dedica e mo e ime o p ospec ing o new in es men s. Fu he mo e, he s udy also ies o L.M. Ca nei o – The de e minan s o mu ual und ees: In e na ional e idence 107 unde s and whe he he unds’ pas pe o mance and acking e o s impac ees. The emainde o his pape is s uc u ed as ollows. Sec ion 2 desc ibes he da a and a iables, while Sec- ion 3 explains he me hods. Sec ion 4 epo s and dis- cusses he main empi ical indings. Finally, Sec ion 5 p esen s he main conclusions. 2. Da a and a iables 2.1 Da a The analysis ca ied ou in his wo k u ilizes he Reu e s-Lippe da abase, which comp ises a la ge sam- ple o mu ual unds o e ed in a ious coun ies a ound he wo ld. This pape ocuses only on open-end ac i ely managed equi y mu ual unds om 2002 o 2018. Da a on passi e equi y mu ual unds and ETFs a e used jus o calcula e he size o he equi y mu ual und indus y and he und indus y He indahl in each coun y. The sample includes da a om 32 coun ies in which he unds a e sold o domiciled. Fo each und con ained in his sample, he da a con ains a se ies o in o ma ion, such as (i) name o he und, (ii) coun y o domicile, (iii) coun y o sale, (i ) benchma k, ( ) asse managemen company, ( i) mon hly ne asse al- ues, ( ii) mon hly o al ne asse s (TNA), and ( iii) o al expense a ios (TERs). This s udy also encompasses da a on he mon hly closing alues o each benchma k o compu e he alpha gene a ed by each und in each pe iod. Fo s a is ical es ing, he sample was sepa a ed ac- co ding o he coun y o sale o domicile o he und (Kho ana, Se aes and Tu ano, 2008). The und indus- y cha ac e is ics o each coun y equi ed us o iden- i y he na ionali y o he und and he coun ies whe e he und is a ailable o sale. Thus, he und’s coun y o domicile indica es whe e he und is legally es ab- lished, whe eas he coun y o sale ep esen s he places whe e he und is aded. I he analysis we e es ic ed o he und's coun y o domicile, we would p esume ha his und is sold solely in i s home coun y. Since some unds a e o e ed o sale in se e al coun ies and ha e mul iple sha e classes, we can ha e se e al obse - a ions o he same und in a gi en yea when consid- e ing he sample by coun y o sale. Howe e , o al ex- pense a ios do no a y o he same und acco ding o he coun y o sale. Finally, my sample con ains 20,684 ac i ely man- aged mu ual unds o e ed o sale o domiciled in 32 di e en coun ies, wi h o al ne asse s summing up abou US $ 5,1 illion as o Decembe 2018. The sam- ple comp ises exis ing unds and unds ha ha e al- eady been liquida ed. In his sense, he da a is ee o su i al bias. Da a on he g oss domes ic p oduc (GDP) pe capi a o each coun y was ex ac ed om he Wo ld Bank da a. Fig. 1 shows he p og ession o he TNA-weigh ed TERs o e ime by egion o domicile. I e eals ha in mos egions such ees do no show g ea a ia ion, ex- cep in he Uni ed S a es, whe e he educ ion in o al expense a ios is con inuous, and in B azil and Sou h A ica, whe e he alls a e also signi ican . No e ha he da a o Japanese unds we e a ailable in Reu e s-Lip- pe jus a e 2005. Figu e 1 TNA-weigh ed TER by yea o ac i e unds om 2002 o 2018 by egion o domicile o unds. 2.2 Va iables • Fund-le el a iables: - Fou - ac o alpha is he und annual excess e- u n calcula ed u ilizing he und’s benchma k- adjus ed e u ns o e he las 24 mon hs in US dolla s, ollowing he ecen pe o mance measu emen li e a u e (C eme s e al., 2016; Sensoy, 2009). Acco ding o he und geo- g aphic ocus, his wo k used egional o global ac o s, ex ac ed om he Fama-F ench (F-F) ac o da a om he websi e o Kenne h F ench. Following Angelidis, Giamou idis and Tessa oma is (2013), his s udy also applied he benchma k adjus men o he ou - ac o model o Ca ha (1997), o ge impa ial alphas o he unds. The model o calcula e he alpha is desc ibed in Equa ion (1), whe e MKT is he equi y ma ke e u n o e he isk- ee a e in US dolla s, meanwhile SMB, HML and MOM a e size, alue and momen um ac o s. - R𝑓,𝑦 − 𝑅𝑏,𝑦 = 𝛼𝑓+ 𝛽1MKT𝑦+ 𝛽2SMB𝑦+ 𝛽3HML𝑦+ 𝛽4MOM𝑦+ 𝜖𝑓,𝑦 (1) 108 Ekonomická e ue – Cen al Eu opean Re iew o Economic Issues 25, 2022 - Ac i e sha e is he annual pe cen age o ac i - i y o a und, measu ed ollowing Amihud and Goyenko (2013). They in oduced his new measu e o in es men und ac i i y ha dis in- guishes he p opo ion o he und e u ns a i- ance ha is due o non-sys ema ic isk. Since hen, e u n-based ac i i y measu es ha e been widely used in he equi y und li e a u e (He mann, Rohlede and Scholz, 2016; Mülle and Webe , 2012). So, he und ac i i y is gi en by 1−R² and he R² is es ima ed using he e- g essions o de e mine he ou - ac o alpha. - T acking e o is he annualized s anda d de i- a ion o he di e ence be ween he e u n o mu ual und o e benchma k b in mon h m. - TER is he in es o s’ ees ha con ain he man- agemen ees, adminis a ion cos s, as well as main enance, audi ing, and legal expendi u es. - To al ne asse s ep esen he TNA in US dol- la s. - Family o al ne asse s is he TNA o equi y unds in he same managemen company ex- cluding he own und’s TNA. - Age is he numbe o yea s since he und launch da e. - Flow is he und’s TNA g ow h in pe cen age, ne o i s in e nal g ow h. • Coun y-le el a iables: - Fund indus y size is he sum o TNA alues in dolla s o ac i e and passi e unds in he und’s domicile o coun y o sale. - Fund indus y He indahl calcula es he con- cen a ion le el o he und indus y in he und’s domicile o coun y o sale. - GDP pe capi a is he g oss domes ic p oduc pe capi a in US dolla s in he und’s domicile o coun y o sale. - In e na ional is a dummy a iable ha akes he alue 1 i he und is domiciled in a coun y ha is di e en om i s coun y o sale and he alue 0 i i is domiciled in he same coun y whe e his und is a ailable o sale. 2.3 Desc ip i e s a is ics Table 1 displays he main desc ip i e s a is ics o he ac i e mu ual unds in he sample o he pe iod be- ween 2002 and 2018 by coun y o sale (Panel A) and domicile (Panel B) o he und. This able e eals ha on a e age he ee o an ac i e und is 1.63% when con- side ing he sample by coun y o domicile, and 1.74% when conside ing he sample by coun y o sale. Fu he mo e, i is possible o e i y ha he a e age and median o alphas gene a ed by ac i e unds a e nega i e o ac i e unds in he sample by coun y o sale o domicile, e en hough he le el o ac i i y o hese unds has i s a e ages and medians abo e a leas 80%. The median age o he unds is 8 yea s, while he mean is abou 10 yea s in bo h samples. The a e age size o an ac i e und is US$356.64 million in he sample by coun y o sale and US$337.20 million, conside ing he sample by coun y o domicile. Table 1 Desc ip i e s a is ics by coun y o sale and domicile o unds. No e This able shows he numbe o obse a ions, he me- dian, he mean and he s anda d de ia ion o he main a ia- bles used in he s a is ical es s. 3. Me hods This pape a emp s o ind he de e mining ac o s o ac i e unds ees. Equa ion (2) in es iga es he asso- cia ion be ween ac i e unds’ ees and he 4- ac o al- pha gene a ed by hem in he p e ious yea (4 .alpha), hei ac i e sha e (ac i e.sha e), hei acking e o in he p e ious pe iod ( .e o ). The es s also included o he unds’ cha ac e is ics ha may a ec ac i e unds ees ollowing o he s udies in he li e a u e on mu ual und (Gil-Bazo and Ruiz-Ve dú, 2009; Kho ana, Se aes and Tu ano, 2008; Wahal and Wang, 2011), such as o al ne asse s, amily o al ne asse s, age and lows. The es conside ing sample by coun y o sale also includes a dummy a iable ha equals 1 i he und is in e na ional and 0 i i is local. The eg ession also con ains cha ac e is ics o he coun ies whe e he und L.M. Ca nei o – The de e minan s o mu ual und ees: In e na ional e idence 109 is domiciled o egis e ed o sale, such as unds indus- y size, he He indahl index and he GDP pe capi a. TER𝑓,𝑦 = 𝛽0+ 𝛽14 . alpha𝑓,𝑦−1 + 𝛽2𝑎𝑐𝑡𝑖𝑣𝑒. 𝑠ℎ𝑎𝑟𝑒𝑓,𝑦 + 𝛽3𝑡. 𝑒𝑟𝑟𝑜𝑟 𝑓,𝑦−1 + 𝛽4logTNA𝑓,𝑦 + 𝛽5logFam. TNA𝑓,𝑦 + 𝛽6Age𝑓,𝑦 + 𝛽7Flows𝑓,𝑦 + 𝛽8logInd. size𝑐,𝑦 + 𝛽9logGDP𝑐,𝑦 + 𝛽10He indahl𝑐,𝑦 + 𝛽11In l𝑐,𝑦 + 𝑐+ 𝑦+ 𝑏+ 𝜖𝑓,𝑦 (2) Go mley and Ma sa (2013) unde sco ed ha he con ol o unobse ed he e ogenei y is undamen al in empi ical esea ch in inance, as he in es iga ed a ia- bles may depend on ac o s ha a e no obse able and, i hese ac o s a e co ela ed wi h ou a iables o in- e es , wi hou he p ope ea men , he bias o omi ed a iables can ha m he es ima ed pa ame e s and p e- en causal in e ence. In his con ex , he empi ical es s pe o med he e use coun y ixed e ec s o cap u e un- obse ed he e ogenei ies ha a e due o cha ac e is ics o he und’s coun y o sale o domicile (Kho ana, Se aes and Tu ano, 2008). Benchma k ixed e ec s we e also included o ge he e ogenei ies ela ed o he und’s in es men objec- i es ha can explain ac i e unds ees (Adams, Mansi and Nishikawa, 2012; C eme s e al., 2016). Besides, yea - ixed e ec s we e added, seeking o cap u e unob- se ed abno mali ies ha a y o e ime. Go mley and Ma sa (2013) also emphasized ha impo an sou ces o unobse ed he e ogenei y a e common in g oups o obse a ions and, al hough he es ima es a e consis en , he s anda d e o s mus be app op ia ely adjus ed o conside he educed deg ees o eedom. Thus, acco d- ing o he au ho s, when es ima ing clus e - obus s anda d e o s, his adjus men is no necessa y, as i allows o he e oscedas ici y and in ag oup co ela- ions. The e o e, he s anda d e o s a e clus e ed by coun y in he eg essions. 4. Resul s The e is a lou ishing in e es in he ees cha ged by mu ual unds. Less compe i i e ma ke s can s imula e unds managemen companies o cha ge highe ees (Wahal and Wang, 2011). Kho ana, Se aes and Tu- ano (2008) a gued ha compe i i e ma ke s lead o lowe p ices, bu less p o i able ma ke s would a ac ewe en an s. The compe i ion is endogenous, bu o he coun y o unds cha ac e is ics may explain he wide a ia ion in ac i ely managed p oduc s ees (Kho ana, Se aes and Tu ano, 2008). In his sec ion, his pape examines he ac o s ha could a ec ac i e unds ees. Table 2 displays he es- ima es o my panel da a eg ession, in which he de- penden a iable is he o al expense a io o an ac i e und a he end o each yea . The model is he one p e- sen ed in Equa ion (2). Column 1 conside s he sample by coun y o sale, whe eas Column 2 p esen s he e- sul s o he sample by coun y o domicile. Table 2 De e minan s o he TER o an ac i e und. TER TER By coun y o sale By coun y o domicile (1) (2) 4- ac o alpha (lag) -0.3000*** -0.2000*** (0.0150) (0.0300) Ac i e sha e -0.0580*** -0.0140 (0.0073) (0.0130) T acking E o (lag) 0.3800*** 0.3100*** (0.0160) (0.0390) To al ne asse s (log) -0.0300*** -0.0420*** (0.0006) (0.0012) Family TNA (log) -0.0180*** -0.0420*** (0.0007) (0.0012) Age 0.0055*** 0.0082*** (0.0001) (0.0003) Flows -0.000002*** -0.000001*** (0.0000) (0.0000) Fund ind. size (log) 0.0460*** -0.0230*** (0.0100) (0.0110) GDP pe capi a (log) 0.1500*** 0.2900*** (0.0220) (0.0440) Fund ind. He indahl -0.00001*** -0.0001*** (0.00001) (0.00001) In e na ional 0.1100*** (0.0033) Obse a ions 336,031 115,259 𝑅2 0.2200 0.3600 Adjus ed 𝑅2 0.2200 0.3600 No e: This able p o ides esul s o panel eg essions in which he dependen a iable is he TER o a und a he end o he yea . All o he eg essions include yea , benchma k and coun y dummies. Coun y-le el clus e ed obus s and- a d e o s a e epo ed in pa en heses by coun y o sale (col- umn 1) o domicile (column 2) o he und. Labels ∗, ∗∗ and ∗ ∗ ∗ deno e s a is ical signi icance a 10%, 5% and 1% le - els, espec i ely. This wo k inds e idence ha he alphas gene a ed in he p io yea nega i ely a ec he o al expense a io o ac i e equi y unds. This esul is also economically signi ican : a 1% gain in he alpha gene a ed by ac i e unds gene a es an app oxima ely 0.30% dec ease in he ees cha ged, conside ing sample by coun y o sale o he und, and 0.2% conside ing he sample by 110 Ekonomická e ue – Cen al Eu opean Re iew o Economic Issues 25, 2022 coun y o domicile. Gil-Bazo and Ruiz-Ve dú (2009) also ound e idence o a nega i e ela ion be ween unds’ pe o mance and ees. Since hese indings a e coun e -in ui i e, Gil-Bazo and Ruiz-Ve dú (2009) p oposed 3 possible easons o his nega i e associa- ion: (i) unds wi h wo se pas pe o mance e ain in- es o s ha a e less sensi i e o pe o mance and unds manage s op imally inc ease ees when con on ed wi h an inelas ic demand; (ii) unds wi h lowe expec ed pe - o mance op imally se highe ees and aim in es o s less sensi i e o pe o mance, while unds wi h be e pe o mances keep ees low because o compe i ion o pe o mance-sensi i e in es o s; (iii) unds wi h low expec ed pe o mance a e ma ke ed o in es o s less sensi i e o pe o mance and ha e highe dis ibu ion cos s. My esul s also indica e ha unds wi h g ea e ac- i e sha es cha ge lowe ees, conside ing he sample by coun y o sale o he und. This inding is also in con lic wi h economic in ui ion. This esul could indi- ca e ha mo e ac i e unds pe o m be e and keep ees low because o compe i ion among unds wi h pe o - mance-sensi i e in es o s. Besides, his inding may also signal ha in es o s ha e he e ogeneous p e e - ences o se ices and alue di e en ia ion no ela ed o he po olio (Ho acsu and Sy e son, 2004). In u n, he acking e o posi i ely a ec s he o al expense a io o ac i ely managed equi y unds. C em- e s and Pe ajis o (2009) unde sco ed ha while s ock- picking is mo e ela ed o unds’ ac i e sha e, he ack- ing e o ela es o he sys ema ic ac o be s. In his sense, my indings may e eal ha unds ha p i ilege ac o ial be s may cha ge highe ees. Kho ana, Se aes and Tu ano (2008) epo ed ha ees a e no mally mo e ele a ed o in e na ional unds han o unds sold and domiciled in he same coun y. My indings co obo a e hem, indica ing ha in e na- ional unds a e associa ed wi h highe ees. In addi ion, he highe alues o he TERs, as indica ed in he de- sc ip i e s a is ics, and he inclusion o a dummy o in- e na ional unds con ibu e o some imes di e gen e- sul s be ween he samples by coun y o sale and dom- icile. The eg essions ou comes o o he unds cha ac e - is ics a e in line wi h p e ious indings. Equi y mu ual und o al expense a ios dec ease as he size o hese unds inc eases, e lec ing he p esence o economies o scale (El on, G ube and Blake, 2012; Ge anio and Zano i, 2005; Gil-Bazo and Ruiz-Ve dú, 2009; Kho ana, Se aes and Tu ano, 2008). My indings also sugges ed he p esence o economies o scope in he ac- i e und’s indus y, as he ees a e also smalle as he size o he unds in he same amily g ows (Ge anio and Zano i, 2005; Gil-Bazo and Ruiz-Ve dú, 2009; Kho ana, Se aes and Tu ano, 2008). Mo eo e , echoing he indings in Kho ana, Se aes and Tu ano (2008), I ob ained a esul ha does no i well wi h a ional in ui ion: unds in coun ies wi h smalle indus ies cha ge lowe ees han hose in coun ies wi h highe TNA, conside ing he sample o unds by coun y o domicile. Finally, he esul s indi- ca e ha inc eases in he age o a und and high le els o GDP a e associa ed wi h highe ees (C eme s e al., 2016). Bu , he highe he mu ual und indus y’s con- cen a ion is he lowe he ac i e unds’ ees. 5. Conclusion This pape examines he de e mining ac o s o ac- i e unds ees using da a om 2002 o 2018 o equi y mu ual unds om 32 coun ies. This s udy inds e i- dence ha he alphas gene a ed in he p io yea nega- i ely a ec he ees cha ged by ac i e equi y unds. My esul s also indica e ha unds wi h g ea e ac i e sha es cha ge lowe ees. These indings, despi e being coun e in ui i e, may signal ha in es o s ha e he e o- geneous p e e ences o se ices, o a demand-side ma ke segmen a ion among in es o s wi h di e se pe - o mance sensi i i ies o e en a ce ain i a ionali y o in es o s. Fo o he unds cha ac e is ics, he esul s a e in line wi h p e ious indings. La ge unds ha e lowe o al expense a ios, indica ing possible economies o scale- Fu he mo e, ees also diminish as he size o he unds’ asse managemen companies becomes la ge . 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