Transaction Costs, Portfolio Characteristics, and Mutual Fund Performance
Management Science, Forthcoming
69 Pages Posted: 7 Nov 2013 Last revised: 14 Oct 2019
Date Written: October 13, 2019
We study the interdependencies between transaction costs, portfolio characteristics, and mutual fund performance. Using a novel dataset of actual mutual fund trades, we find that, controlling for investment style, larger funds realize lower percentage transaction costs than smaller funds. Larger mutual funds trade less frequently and hold bigger stocks to actively avoid incurring higher trading costs. Gross returns of larger funds are lower than those of smaller funds due, in part, to the characteristics of their holdings, which suggests that decreasing returns to scale could arise due to limited investment opportunities because of trading cost constraints. Taken together, our results highlight the tradeoffs faced by mutual funds between trading costs, portfolio characteristics, and fund performance as they grow in size.
Keywords: Mutual funds, trading costs, fund size, portfolio characteristics, fund performance
JEL Classification: G2, G20, G23
Suggested Citation: Suggested Citation