Research Of China Open-end Fund Size Effect On Its Performance

As the capital market in China develops and the investors become more mature, the scale of open-ended fund in China is expanding every year. The number of funds issuedby fund management company increases rapidly.By the end of June2014, there are93fund management companies, which manage3611.8billion assets. The figure has reached a new record. Among1714public offering of funds, open-ended funds have taken hold with the figure of1587. The fund management companies charge a fixed rate of management fee, so they normally pursue large scale, which will generate more income.However, is the large scale a good thing for investors? And will the large scale definitely bring more benefits to the fund manager? It is generally acknowledged that large fund management companies have more resource. They can purchase more data and employ more professionals. Meanwhile, the fixed cost in fund management won’t have a proportionate increase as the scale become larger, which brings economies of scale. But the expansion will also bring various problems. For example, from the point of liquidity constraint, as the fund becomes larger, fund managers are no longer the price taker in the market. Under some circumstance, their transaction will have an impacton market price, leading to the increase of friction cost in daily trading and squeeze risk during crisis. From the fund management point of view, the management might loseefficiency as the fund becomes larger, there is likely to be a gap between the growingscale and the management ability. A large-scale fund requires to hire more fund managers; it will increase the salary cost and management difficulty. Potential diseconomies of group decision will also have a negative impact on fund return. Moreover, managing a large asset portfolio, even the most aggressive fund managers may be forced tochange to a conservative investment style. Conserved investment style normally means lower risk as well as lower return. In this paper, the relationship between the open-ended fund performance and the fund scale would be discussed through theoretical and empirical analysis. The paper explains the impact from the way a fund invests and the liquidity shifts on fund performance. A math model is established to test the hypothesis and proves a fund scale is negative to fund performance even after excluding theeffects of the fund’s turnover and cash-in flow.