Systematic Study On Chinese Mutual Fund Fees

For investors, fund fees are the price paid for investment management, distribution, and other services; for financial service firms, they generate revenue. Fees are important for both groups. A reasonable fund price must have several characteristics:on one hand it can attract investers,and made them choose holding the fund as long as possible., on the other hand of course the fees must bring enough profits for fund managers. This study investigates the consequences of fee regulation in the burgeoning Chinese mutual fund industry, where the main fee structures are government determined through the capping of management expense ratios and custody fees.In this paper, I investigates mutual fund fee setting behavior around regulated fee caps or ceilings in Chinese stock funds from 2004 to 2009, following the introduction of the Chinese Securities Investment Law. Contemporary empirical research on the efficacy of mutual fund fee regulation is limited even though caps are touted as means of investor protection. The results suggest that funds are more likely to charge management fees near the regulated ceiling over time. Fee ceilings have a perverse impact as their presence is significantly correlated with higher unregulated fees. These findings demonstrate that fee ceilings do not only slowly competition, but also increase discretionary fees charged to investors.The paper is organized as follows. Section one presents a summary and review about the fund fee research status. Section two describes institutional details of the Chinese fund industry, gives a framework introduction about the various fund fees; Section three is a theory exploration about fund fees; Section four made us find the main variables employed in the empirical analysis; section five discusses the econometric models used in this study and presents the results while Section six concludes the paper, and puts forward for the policy recommendations.The first contribution of this paper is that I have examined whether a fee cap imposed by regulators acts as a focal point for all fund managers in setting their fees. In other words, do all funds collude to set their management and custody fees close to the fee cap over time. The second contribution is to analyze the coexistence of capped fees with those that are charged at the fund managers' discretion. We investigate the link between the setting of the main types of fund fees relative to regulated ceilings and the level of discretionary fees using a double-hurdle model.The main findings can be summarized as follows. First, the paper shows evidence in support of the focal point hypothesis. Chinese funds charge fees close to regulated ceilings over time. This suggests fee caps may act as "focal points" that help facilitate implicit collusion. Second, model result shows that larger stock funds charge higher levels of discretionary fees when they set regulated fees at the ceiling.This study concludes that the regulated fee cap upon the main types of mutual fund fees in China has contributed significantly to an increase in their total expense ratios. While the regulation of fees was meant to curb the mutual fund expenses passed on to investors, competition among stock funds is weak given an increase in the number of funds charging management fees at the ceiling. The regulatory objective has not been achieved as fund managers simply recouped their losses in main income stream by charging investors higher discretionary fees.