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Is size an input in the mutual fund performance evaluation with DEA?

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Abstract

It has been a common practice to evaluate the performance of mutual funds with data envelopment analysis (DEA). However, DEA itself is a “black box”, since there are no pre-determined inputs or outputs. This paper aims to add clarification to the “black box” nature of DEA by investigating whether fund size has to be included among DEA inputs in the Turkish mutual fund performance evaluation. Fund managers receive a proportion of fund size as compensation. Therefore, besides the traditional risk and expense inputs, economies or diseconomies of scale may also be effective in the fund’s performance. For these reasons, the evaluation of fund performance by using DEA may require fund size as an input. Yet, few international study adds size as an input to the DEA. The evidence is even scarcer for developing country fund markets. To the extent of our knowledge, size has not been utilized in the Turkish mutual fund performance evaluations. This paper aims to contribute to the literature by examining the linear and nonlinear relations between DEA scores and fund size for the Turkish mutual fund industry. For this aim, linear correlation, and Kendall and Spearman rank correlation coefficients are employed as well as a regression specification. The correlations and the regression results reveal a linear relationship between the efficiency scores and fund size. In general, this study presents stronger evidence for the fund size and fund efficiency relation than Basso and Funari (Eur J Finance 23:457–473, 2017) for the Turkish mutual fund market.

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Notes

  1. All of the analyses mentioned above are repeated by eliminating the largest fund which is determined as an outlier in order to understand whether the efficient frontier is under the outlier’s influence. The results are virtually the same. To conserve space, they are not given in the paper, but available on request.

  2. In a similar study, Babalos et al. (2012) add fund age with fund size among the explanatory variables in their regression analysis. Baghdadabad Tavakoli and Noori Houshyar (2014) use management and incentive fees besides fund size. Margaritis et al. (2007) only include the national vs international orientation of funds with fund size while investigating the possible factors affecting the fund efficiency. Since the aim of this study is to primarily detect the relation between fund size and efficiency and its exact shape is unknown, as in Basso and Funari (2017) we limit our regression analysis with only including size variable.

  3. Domestic investors are the main investor group in the Turkish mutual fund market. 96% of the Turkish mutual funds are held by domestic investors (TSPB 2015).

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Acknowledgements

A preliminary version of this paper was presented at the 26th EBES Conference—Prague on October 24–26, 2018 in Prague, Czech Republic with the support of the Istanbul Economic Research Association. The authors would like to thank to the participants and reviewers of the conference for their valuable comments and suggestions.

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  1. İşletme Bölümü, Ankara Üniversitesi, Siyasal Bilgiler Fakültesi, Cebeci Kampüsü, Cemal Gürsel Bulvarı, Cebeci, Ankara, Turkey

    Sevgi Eda Tuzcu & Emrah Ertugay

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  1. Sevgi Eda Tuzcu
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Correspondence to Sevgi Eda Tuzcu.

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Tuzcu, S.E., Ertugay, E. Is size an input in the mutual fund performance evaluation with DEA?. Eurasian Econ Rev 10, 635–659 (2020). https://doi.org/10.1007/s40822-020-00141-6

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