Causal Machine Learning for Heterogeneous Cost Effects in Mutual Funds: A Double Machine Learning and Causal Forest Approach

Abstract

The cost–performance relationship in mutual funds is a longstanding open question in financial economics, particularly when costs are assumed to exert a single, linear effect on returns. This study proposes an integrated causal machine learning framework to revisit this question using a panel of Hungarian open-ended public investment funds across all major asset classes—equity, bond, absolute yield, misc, money market, real estate, and commodity—covering 2017–2024. Six machine learning algorithms are benchmarked for return prediction, and Double Machine Learning, with fund-level cluster-robust inference and year fixed effects, is applied to estimate the effect of the Total Expense Ratio (TER) on next-year returns, under the identifying assumptions stated in the paper, while flexibly controlling for a set of observed fund-level confounders (size, NAV dynamics, volatility, past and cumulative performance, and fund age) without imposing a linear functional form. To move beyond average effects, a Causal Forest model—tuned using an out-of-fold, effect size-neutral selection criterion—estimates heterogeneous treatment effects across funds, and SHAP-based interpretation uncovers the mechanisms underlying this heterogeneity. The results show that, once the outcome is measured in the year following the one in which TER is observed and panel dependence is properly accounted for, the average TER effect is not robustly different from zero at the full-sample level; where a statistically robust effect emerges, it is negative rather than positive, concentrated in equity and absolute-yield funds, and largely confined to the period after 2022, which coincided with the war in Ukraine, rising interest rates, and heightened market volatility, although the research design does not identify which, if any, of these developments drove the change. Average-effect models are shown to conceal this heterogeneity, and the results are further shown to be sensitive to two methodological choices that might otherwise appear secondary—the timing convention linking cost and return, and the criterion used to select among competing heterogeneous-effects specifications—underscoring the importance of making such choices explicit. These findings demonstrate the added value of combining predictive and causal machine learning, together with identification-robust and panel-robust inference, for uncovering heterogeneity that conventional econometric approaches overlook and offer a transferable methodological template for causal machine learning applications in finance and other high-dimensional decision-making domains.