Dynamics and performance of decentralized portfolios with size-induced fund flows

Abstract

Interpreting the effects of scale on fund performance, portfolio dynamics and management fees

Acknowledgements

The authors are grateful to two anonymous reviewers for their helpful comments and advice. The paper does not represent the view of CMRE.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 See 2017 Investment Company Fact Book, available at https://www.ici.org/.

2 There is a growing body of literature on the asset pricing implications of the delegated intermediary investment structure, see He and Xiong (2013).

3 Given the popularity of the decentralized structure, the implications of our analysis are essentially applicable to the investment management divisions of the institutions like banks, mutual funds, and pension funds with a decentralized structure locally or globally.

4 Evidence on size-performance relationship is controversial. The classical paper (Carter 1950) believe the advantages of large fund sizes such as more resources and lower commissions. By contrast, recent work seems to support the cost disadvantage of large stock funds (e.g. Chen et al. 2004, Pollet and Wilson 2008).

5 We provide a package of transparent Matlab programs producing numerical results and robustness checks upon request. In the paper, we present many results obtained by varying key variables, which show the strong robustness of our numerical solution.

6 Cummings (2016) reports that a fund with allocations to multi-assets captures scale economies that are not captured by single-asset funds.

7 The approach is inspired by the American options pricing of Longstaff and Schwartz (2001).

8 Our robust check shows that raising the number of simulation paths does not improve the accuracy of numerical results at a reported level.