Size not everything in active management


By Sarah Kendell

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The size of a managed fund might not have any direct link to its performance, providing a manager considered new strategies and approaches when a given fund began to grow in size, according to new research from the Centre for International Finance and Regulation (CIFR).

The research paper, authored by CIFR research director Geoff Warren and Investors Mutual portfolio manager Michael O’Neill, found that contrary to common industry wisdom, there was no specific level of scale beyond which a fund could dilute returns if it left itself open to more new investors.

Instead, managers should view scale as a ‘horses for courses’ issue, Warren said, and target different asset classes and strategies as funds under management (FUM) increased.

“An optimal scale need not exist for asset owners that run multi-asset portfolios – instead … both where and how a fund invests should evolve as it grows,” he said.

The study identified the characteristics of a management strategy that could successfully be carried through as a fund grew from small to large in size, namely that the strategy had to be replicable in public markets, had limited reliance on constant trading in large volumes and was looking to trade against market consensus.

Additionally, if the strategy faced limited competition from other investors and could achieve economy of scale benefits from growing, it was likely to be able to continue as FUM rose.

However, strategies that lay outside these characteristics would need to be altered in order for the manager to continue to be successful.

More broadly, it was likely larger funds would do well at strategies that focused on market exposures or beta, while smaller funds would most likely excel at picking up opportunities that were insignificant to larger players.

“Capacity problems and return erosion can emerge as FUM increases if an asset owner continues to manage in the same manner, however, this need not occur,” the paper said.

“Asset owners should adjust to focus attention on where the balance between return opportunities and capacity is most appropriate for their size.”

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