Size and Investment Performance : A Research Note

This study examines the performance of actively managed Australian equity funds and the extent to which both fund size and manager size is related to risk-adjusted returns. Larger investment managers, by definition, engage in higher trade volume. The literature documents that transaction costs and trade difficulty increase with trade size, given difficulties associated with ‘large’ trades and their potential market impact on security prices. Therefore, ceteris paribus, large orders are consistent with lower levels of efficiency in trade execution and higher transaction costs. While larger investment managers may experience material disadvantages relative to their smaller counterparts, the Australian literature to date has largely ignored the issues of asset size and the long run performance of investment offerings. This paper, employing returns and fund size data that controls for survivorship bias, documents that while large retail active equity funds earn higher risk-adjusted returns (after expenses) than small funds, the difference in mean performance is not significantly different. In the institutional sphere, the study also finds no significant performance differences (after expenses) between funds on the basis of portfolio size. These findings suggest the hypothesis that fund performance is significantly disadvantaged in terms of asset size is not supported empirically. JEL classification: G23