As mutual funds gather assets, they tend to face obstacles in maintaining their performance. As large inflows of cash need to be invested, fund managers may encounter liquidity problems in buying assets. They may also be pressed into selecting assets further away from the core objective of the fund.
FSA has tested this effect on a sample of China equity mutual funds available for sale in Hong Kong and/or Singapore, excluding ETFs and index funds. We looked at the funds’ monthly returns over the past three calendar years and compared them to the average size of each fund during the year, using data from Morningstar.
While we have found that average monthly returns appear to vary with the size of the fund, the common wisdom seems not to hold. In particular, in the very prosperous year of 2017, when the median monthly return of China equity funds was around 3%, the largest funds, above $1bn in assets, did best, while smaller ones, below $100m in assets did, on average, poorly by comparison.
| Fund size | Median monthly return (%) | ||
| (US dollars) | 2015 | 2016 | 2017 |
| < 10 m | -0.76 | -0.42 | 2.75 |
| 10 m – 100 m | -0.72 | -0.37 | 3.02 |
| 100 m – 1 bn | -0.67 | -0.24 | 3.01 |
| > 1 bn | -0.73 | -0.36 | 3.15 |
Data: Morningstar, returns in US dollars. Table represents 144 funds for sale in Hong Kong and/or Singapore.
In 2016, which started with a dramatic drop, but then led to a modest recovery in Chinese equities, funds between $100m and $1bn in size had the lowest average monthly losses. The smallest funds, again, did poorly by comparison.
In 2015, when Chinese equities were subject to extreme volatility, there was a similar result.
While obviously there are outliers, such as outperforming small funds, and underperforming giants (see the chart below), it appears that in good markets, an investor in Chinese equities would be wise to stick with the largest mutual funds, while in volatile ones, those between $100m and $1bn are the safest bet. Smaller funds, especially those with less than $10m in assets on average delivered disappointing results, by comparison.
Average monthly returns of China equity funds
