Transaction Costs, Portfolio Characteristics, and Mutual Fund Performance

Management Science, Forthcoming

69 Pages Posted: 7 Nov 2013 Last revised: 14 Oct 2019

See all articles by Jeffrey A. Busse

Jeffrey A. Busse

Emory University - Department of Finance

Tarun Chordia

Emory University - Department of Finance

Lei Jiang

Tsinghua University

Yuehua Tang

University of Florida - Department of Finance

Date Written: October 13, 2019

Abstract

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

Busse, Jeffrey A. and Chordia, Tarun and Jiang, Lei and Tang, Yuehua, Transaction Costs, Portfolio Characteristics, and Mutual Fund Performance (October 13, 2019). Management Science, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2350583 or http://dx.doi.org/10.2139/ssrn.2350583

Jeffrey A. Busse

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-0160 (Phone)
404-727-5238 (Fax)

Tarun Chordia

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States
404-727-1620 (Phone)
404-727-5238 (Fax)

Lei Jiang

Tsinghua University ( email )

Beijing, 100084
China

Yuehua Tang (Contact Author)

University of Florida - Department of Finance ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

HOME PAGE: http://sites.google.com/site/yuehuatang

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