Wednesday, April 30, 2008

It's not the size that counts?

DOES the size of a fund (the amount of assets under management) affect its investment performance? Most consultant would says the old adage "it's not size, but technique" applies even to unit trusts.

But it is more accurate to see the performance of a fund as affecting its size. The large funds in the market today have grown because of their good past performance.

The same portfolio management skills are required for large or small funds. However, in the case of large funds, an important factor influencing performance is the fund's ability to buy or sell large volumes quickly - the portfolio's tradability.

In addition, it's often difficult for large funds to acquire significant exposure to the shares of smaller companies (that may add spice to the portfolio).

Top-performing small funds tend to attract investment quickly, and thus soon become large funds. These rapidly growing small funds are possibly the most difficult to manage, as the high daily cash inflows need to be managed effectively.

But many rapidly growing funds can sustain performance with good management and thus their larger size has not had a negative effect.

Underperforming small funds are unlikely to attract large inflows and so remain small. Some larger funds are poor performers while others have performed well, making it difficult to generalize on size.