Explaining the expense ratio of international equity funds

Abstract

Purpose

The purpose of this paper is to examine the determinants of fund expense ratio for Malaysia-based international equity funds. An understanding of what these factors are and how they affect a fund’s expense ratio is important given that international funds can be expensive to operate and that fund expenses have negative impact on investors’ returns.

Design/methodology/approach

This study employs a standard cross-sectional regression model in examining the factors that influence fund expense ratio of international equity funds.

Findings

The findings show that sales charge is positively related to fund expense ratio although it is not included in the expense ratio computation. This suggests that investor could possibly incur additional “hidden cost” since sales charge represents an upfront cost that an investor has already paid at the time of the fund sale. Additionally, funds with aggressive investment objective and frequent portfolio turnover show higher expense ratios than funds with conservative investment objective and less trading activities. There is no evidence that fund size, fund age, and the number of funds in a fund family are significantly related to the fund expense ratio. While the lack of statistical finding for fund size in this study seems inconsistent with the results of the US market in general, the finding is supportive of the Thai equity fund market and thus implying that finding could be country specific.

Research limitations/implications

There is limited availability of international equity funds in Malaysia.

Practical implications

The findings provide useful insights for investors to make informed international fund selection decisions. Expense-conscious investors should pay particular attention to fund’s sales charge, turnover ratio, and its investment objective when selecting funds for investment.

Originality/value

This paper provides first evidence on the determinants of fund expense ratio of Malaysia-based international equity funds.

Citation

Low, S.-W. (2017), "Explaining the expense ratio of international equity funds", American Journal of Business, Vol. 32 No. 2, pp. 82-92. https://doi.org/10.1108/AJB-07-2016-0021