Size Matters For Active Large-Cap Fund Performance

Over the 15-year period ending March 31, 2019, the biggest 25% of active large-cap equity funds managed about 90% of all the assets under management (AUM) held in active large-cap equity funds. This may suggest that investors’ fund selections skew toward larger funds. But is bigger always better? This topic has been widely debated: although larger funds may be able to hire more skilled fund managers and, in return, managers’ successful track records may attract more assets, one could also argue that smaller funds may face less liquidity constraints in security selection and can “move the needle” with relatively small investments.

In this blog, we explore the effect of size—as measured by AUM—on active large-cap equity funds’ performance. Our study shows that, in the large-cap equity fund category, larger funds tended to take more risk and generate higher returns than smaller ones. However, their main advantage lies in higher survival rates over the long run, which contributed to their lower percentage of underperformance relative to the benchmark.

Over the 1-, 5-, 10-, and 15-year horizons, we first rank all long-only active large-cap equity funds by their size at the beginning of the period and divide them into quartiles, with the first quartile being the largest and the fourth being the smallest. We then compare their returns, volatilities, survival rates, and ability to outperform the S&P 500®. To eliminate the confounding factor of equity capitalization, we limit the universe to large-cap equity funds only. Fund returns are on a net-of-fee basis.

Larger funds were more likely to survive the market cycle than their smaller peers, especially over longer horizons (see Exhibit 1). Among the smallest 25% of funds (fourth quartile) that existed at the beginning of the 15-year study period, only 1 out of 5 survived the entire period compared with a survival rate of over 60% for the largest funds (first quartile) over the same period.

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