Cost Efficiency of German Mutual Fund Complexes

Abstract

Results from frontier analysis show that German investment management companies are far from being cost efficient. The average investment management company may be able to reduce its costs by 48% to 75% when compared with the best-practice company in the sample. The level of efficiency even decreases over the sample period. These results are conservative estimates, since the design of the research allows for the calculation of upper bounds on cost efficiency. Based on a set of consistency conditions, the results are qualitatively the same within and across the different approaches. The results for explaining the nature of cost efficiency indicate that investment management companies with higher average fund sizes and providers of institutional funds are cost efficient whereas providers of real estate funds are less cost efficient than providers of security funds.

Keywords: consistency conditions, cost efficiency, data envelopment analysis, investment management company, stochastic frontier approach

JEL Classification: C14, C23, C44, D24, G23