Investors' transaction costs and fund performance : Quasi-experiment from the fee rate reform for mutual funds = 投资者交易成本与基金业绩表现 : 来自公募基金费率改革的准实验

Abstract

Transaction costs, as an important factor affecting investment returns, have always been a focus of the academic circle and the practical realm. Given the possible two-way causality between transaction costs and fund performance and the impact of other omitted variables, directly verifying the relationship between transaction costs and fund performance will be challenged by endogenous problems. For Mutual Funds, as a core component of explicit transaction costs, fund Fee Rates not only influence investors’ trading decisions, but also may have an effect on fund managers’ investment behavior. China’s mutual funds sector has achieved leapfrog development over the past 20 years, but its Fee Rate mechanism is still lagging behind. Especially after the A-share market experienced a continuous decline from 2021 to 2023, many fund investors suffered losses while portfolio managers still charged management fees at fixed rates. The contrast between the fact that fund investors lost money and the fact that portfolio managers made money has aroused media attention and triggered widespread doubts from investors. To address this problem, the China Securities Regulatory Commission (CSRC) launched a Fee Rate Reform in July 2023 to cut the management fee rates for active equity funds. This large-scale, across-the-board fee reduction model is unprecedented in global markets. Its uniqueness provides a valuable case for studying the interaction between regulatory intervention and market mechanism, and also provides a natural quasi-natural experimental scenario for verifying the impact of transaction costs on fund performance. Therefore, taking the fund Fee Rate Reform as quasi-natural experiment and the active equity funds as samples, this paper focuses on the management fee reduction measures and uses the difference-in-differences (DID) model to systematically explore the impact of investors’ transaction costs on fund performance and its inherent mechanism of action. This study finds that overall the reduction of fund management fees significantly weakened fund performance in the sample time interval. This conclusion still holds after other robustness tests are conducted, including replacing the definitions of core variables, using different fixed effects, excluding alternative explanations and reconstructing test samples. The heterogeneity analysis shows that the relationship between fee reduction and fund performance varies significantly with scenarios: From the perspective of fund resources and capabilities, the funds with smaller size and shorter age were more impacted by fee reduction due to their weaker resource reserves. From the perspective of the incentive mechanism for portfolio managers, the funds with lower management fees and the funds with lower performance rank saw their profitability eroded by fee reduction, which came as a heavier drag on fund performance. From the perspective of fund type, the flexible allocation funds were hit hardest by fee reduction. However, the top general equity funds showed significant divergence: Unlike the overall conclusion of samples, the general equity funds with larger size and higher performance rank even saw improvements in performance after fee reduction. The mechanism test shows that the decline in fund management fee inhibits fund performance through two channels: One is lowering the risk adjustments for funds; the other is lowering trading activity. The conclusion of this paper provides both theoretical contribution and practical aspirations. Theoretically, this paper not only complements the researches on investors’ transaction costs and fund performance, but also expands the theoretical framework of fund Fee Rates and portfolio managers’ active management ability and risk-taking behavior. In practical sense, the conclusion of this paper helps understand the policy effect of Fee reduction reform, and also provides an important empirical basis for the regulatory authorities to optimize the fund Fee Rate structure, improve the fund governance mechanism, and promote the high-quality development of China’s mutual fund sector.