The Efficiency of Mutual Fund Families

Insights from the Spanish Market

Carlos Sánchez González, Carlos Sánchez González, Carlos Sánchez González, Carlos Andres Sanchez Gonzales

• Publisher: Emerald Publishing Limited
• Year: 2018
• Print ISBN: 9781787438002
• eBook ISBN: 9781787439832
• Topic: Business
• Subtopic: Finance
• Index: Business

The investment alternatives offered by mutual funds have had a significant effect on the savings patterns of many countries. Industry research has primarily focused on the funds themselves rather than on their management companies, but like other financial institutions, these companies, also known as mutual fund families, have experienced great periods of both expansion and contraction. It is important to address the efficiency of these institutions, as well.

Carlos Sánchez González fills this gap in our knowledge with this empirical study. He develops an innovative model that considers the management stages of mutual fund companies, overcoming the traditional dispute between the different approaches used in banking and insurance research. Using data envelopment analysis (DEA) to evaluate efficiency levels, Sánchez González investigates the Spanish case, one of the most relevant industries in the Euro market, in order to provide insights into issues that have never been explored before.

His study consists of two parts. The first explains the basic concepts, offers a brief explanation of the basic DEA models, and gives a review of the most important applications to financial institutions, all while developing a unique set of industry-specific variables in order to show how to apply the original slacks-based measure (SBM) approach. The second reviews the major concepts of SBM variations and shows how they can be applied to the Spanish mutual fund family industry in order to obtain unprecedentedly accurate empirical measures of its efficiency.

This ground-breaking work offers much food for thought to academic researchers and postgraduate students of management, finance, and marketing.

PART I
The Efficiency of Mutual Fund Families: Using a Slacks-based Measure

CHAPTER
1

Introduction to Part I

From the early 1990s through the middle of 2007, the mutual fund industry saw remarkable growth worldwide, reaching a maximum of 26.13 trillion U.S. dollars in December 2007 (source: European Fund and Asset Management Association, EFAMA). This successful expansion involved the proliferation of Mutual Fund Management Companies and the inception of a large number of mutual funds, both of which placed greater demands on the business structure of the industry. Then, when the markets experienced the subprime mortgage financial crisis, the mutual fund industry suffered a significant decline in the total assets under management, especially in 2008, primarily driven by a fall in financial investments by households due to an increase in risk aversion sparked by the high market volatility and a drop in confidence in financial instruments as a result of the crisis.¹ This market picture stopped the creation of new management companies and, in some cases, led to the merger or closure of other firms, thereby rearranging the competitive map of the industry. This drop in assets under management and the number of investors is explained not only by the poor image of mutual funds but also by a lack of confidence in the global markets where these funds allocate their primary investment positions. Unfortunately, despite all financial advice about diversification, equity investors had no place to hide in this crisis (Aït-Sahalia, Andritzky, Jobst, Nowak, & Tamirisa, 2012; Bartram & Bodnar, 2009). In many cases, this situation forced financial institutions to rethink their production structures and to create new products not only on their own initiative but also driven by new legislative and regulatory requirements imposed by supervisory authorities who were trying to restore confidence in financial markets (Bernanke, 2009; Kirkpatrick, 2009; McCauley, McGuire, & Von Peter, 2012).

More recently, mutual fund assets worldwide have been slowly returning to the successful figures achieved before the crisis, i.e., 28.4 trillion U.S. dollars managed in September 2012, representing over one-third of the world GDP. This industry employs skilled labor, has spillover effects on other sectors and tax returns, and provides important liquidity to the financial system and wealth for retail and institutional investors. The analysis of the efficiency of mutual fund industry is quite similar to the extensive literature addressed in other financial sectors such as banking and insurance. If banks and insurance companies are more productive, then these financial sectors should obtain better performance, thereby offering new and safer products to their customers at lower prices. According to this argument, Mutual Fund Management Companies should work to offer a wide range of top-performing funds with diverse investment characteristics for different types of investors while keeping fees and expenses as low as possible.² The expansion of these appropriate standards of management should result in higher levels of overall efficiency in the mutual fund industry. It is worth noting that mutual fund activities reduce the exposure of banks to financial-services industry risk and increase scale economies and bank profitability, thereby improving the operating performance of banks (Asaftei, 2008; Gallo, Apilado, & Kolari, 1996). In addition, the analysis of productivity differences across these companies in recent years could make it possible to identify the success or failure of management initiatives and might also highlight the different strategies undertaken by the companies during the financial crisis.

While extensive research has been devoted to productivity in financial institutions, as far as we know, only Zhao and Yue (2010) and Medeiros (2010) have studied the efficiency of mutual fund companies and pension fund companies, respectively. On one hand, Zhao and Yue (2010) examine the core efficiency of Chinese fund firms by analyzing both the investment/research and the marketing/service subsystems. On the other hand, Medeiros (2010) analyzes the changes in total productivity of a sample of Portuguese pension fund companies from 1994 to 2007 by means of a DEA-Malmquist index. A potential explanation for this scarce literature may be the difficulty of identifying specific variables for the appropriate evaluation of these companies without merely replicating the previous studies focused on financial institutions, such as banks and insurance companies. To develop appropriate evaluation models for mutual fund companies, it should be desirable to have a range of possibilities for specific industry variables that would complement those models analyzed in other financial sectors. Therefore, these fund industry-specific proposals should contain relevant management inputs/outputs for mutual fund companies instead of merely using the general approach previously considered in banking and insurance.

This study fills this gap in the financial literature and aims to shed additional light by analyzing the efficiency of mutual fund companies in Spain, which is one of the most relevant fund industries in the Euro market. The significant market concentration of Spanish mutual fund companies is the most challenging feature when obtaining an appropriate evaluation for this industry. That is, the coexistence of a few, very large, and well-diversified Mutual Fund Management Companies together with a huge number of small managers specialized in fund strategy per sector and/or geographical area makes it difficult to obtain appropriate evaluations of the industry as a whole because of the striking differences between competitors. Therefore, a question arises as to the selection of an accurate methodology and management variables to appropriately analyze so heterogeneous a set of Spanish mutual fund companies.

To conduct this analysis, we apply Data Envelopment Analysis (DEA), which has been one of the most popular methods over the past decades for evaluating efficiency in the financial industry (e.g., Berg, Førsund, & Jansen, 1991; Berg, Førsund, Hjalmarsson, & Suominen, 1993; Casu, Girardone, & Molyneux, 2004; Cummins & Xie, 2008; Cummins, Rubio-Misas, & Zi, 2004; Cummins, Weiss, Xie, & Zi, 2010; Holod & Lewis, 2011; Mlima & Hjalmarsson, 2002; Schaffnit, Rosen, & Paradi, 1997).³ and we examine the performance of institutional portfolios as an alternative approach to the traditional performance measures; portfolio performance works with the functional relationships between return and risk associated with behavioral assumptions (e.g., Basso & Funari, 2001; Eling, 2006; Gregoriou, Sedzro, & Zhu, 2005; Lozano & Gutiérrez, 2008a, 2008b; Murthi, Choi, & Desai, 1997).

This first part of study employs an original model and a unique set of fund industry-specific variables that complement the traditional models in banking and insurance, thereby allowing for an accurate and comprehensive evaluation of the overall efficiency of Mutual Fund Management Companies.

We used this innovative approach to address a number of questions regarding the efficiency of Mutual Fund Management Companies in the Spanish market and to further discuss the implications of the results obtained in this analysis. What are the key management stages driving the efficiency of a mutual fund company? Is efficiency robust across the different management stages within a mutual fund company? How does scale affect the efficiency results?

This first part is organized as follows: Section 2 provides a review of the early DEA literature, a brief explanation of the basic models, a short review of major contributions to efficiency in financial institutions, and a discussion of the two most popular approaches. Section 3 describes the proposed theoretical model and the variables used in our analysis. Section 4 illustrates the data, the empirical analysis and results, the influence of the variable-returns-to-scale, and robustness analyses. Finally, Section 5 concludes and summarizes the primary findings.

1. Mutual fund net assets wor...

Table of contents

• Cover
• Title Page
• Part I The Efficiency of Mutual Fund Families: Using a Slacks-based Measure
• Part II Further Evaluation of Efficiency of Mutual Fund Management Companies
• References
• Index