Scale Diseconomies and Capacity in Fund Management: Variation Across Equity Markets

27 Pages Posted: 18 May 2022

See all articles by Michael O'Neill

Michael O'Neill

Bond University - Bond Business School

Jie (Felix) Sun

Mercer

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Min Zhu

University of Queensland

Date Written: May 12, 2022

Abstract

We model the relation between excess returns, fund size and industry size for active equity funds within four markets – global equities, emerging markets, Australia core and Australia small caps – and use the results to investigate the extent to which funds deviate from estimated capacity. We uncover a significantly negative relation between returns and both fund size and industry size across all markets. The estimated percentage of funds operating above versus below capacity varies both across markets and over time, and in the role played by fund size versus industry size. We find greater prevalence of funds operating significantly below than above capacity, in contrast to findings for US equity mutual funds. Significant deviations from estimated capacity persist for a median of between two and six quarters. Our main contribution is to show that the dynamics governing deviations from capacity for active equity funds vary across markets.

Keywords: Equity mutual funds, capacity constraints, economies of scale

JEL Classification: G11, G23, J24

Suggested Citation

O'Neill, Michael and Sun, Jie (Felix) and Warren, Geoffrey J. and Zhu, Min, Scale Diseconomies and Capacity in Fund Management: Variation Across Equity Markets (May 12, 2022). Available at SSRN: https://ssrn.com/abstract=4110228 or http://dx.doi.org/10.2139/ssrn.4110228

Michael O'Neill

Bond University - Bond Business School ( email )

Gold Coast
Australia

Jie (Felix) Sun

Mercer ( email )

Level 16, 33 Exhibition Street
Melbourne Victoria, 3000
Australia

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

Min Zhu

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/min-zhu

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