Bigger Isn't Better? Don't Be So Sure
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Thursday, July 13, 2017

Bigger Isn't Better? Don't Be So Sure

New research pushes back against the idea that scale is a good thing for mutual fund investors. MFWire is skeptical.

Campbell Harvey
Duke University
Professor of Finance

Last month Duke University's Campbell Harvey and Texas A&M University's Yan Liu published a research paper, "Decreasing Returns to Scale, Fund Flows, and Performance." Reuters columnist James Saft picked up on the research, concluding that "size does matter in fund management, and if you are an investor it is not helpful."

Yan Liu
Texas A&M University
Assistant Professor of Finance

Fundsters may want to dig into the full report, available for free downloading at (As of this morning, 92 people have downloaded the paper so far, and 328 have viewed the abstract.) The researchers focus exclusively on fund performance, from 1991-2011.

It's worth noting that the researchers exclude the smallest funds, those with less than $10 million in total net assets, and growing beyond tiny asset levels is critical for the long-term viability of any fund and fund firm.

It's also worth remembering that, while these researchers focus only on performance and flows, scale at the industry, firm, and fund levels has meaningful non-performance-related impacts on fund investors.

At the fund level, as funds grow bigger they are less likely to be merged into other funds or shut down entirely. That means that the investors in those growing funds are less likely to be forced to switch to a potentially different strategy, PM, or fund firm.

At the firm level (the research only looked at scale by fund and across the industry), as fund firms grow bigger, they are better equipped financially to survive long-term. Bigger firms with more assets and more diverse product offerings are better able to survive tough times, like the 2008 financial crisis. And that translates into better being able to help out the funds they run in times of need. Indeed, while an independent money market specialist, the Reserve, collapsed under the weight of its flagship fund breaking the buck after bad bet during the financial crisis, multiple large fund firms used their own capital to make sure that their money funds weathered the storm. Bigger fund firms are also better able to invest in all kinds of things — customer service, educational materials, websites, research, employee travel — that give their current and prospective fund investor clients and investment advisors more help, access, and information, better equipping them to make good decisions.

At the industry level, more scale has translated into more innovation in a variety of ways. Some of that innovation, like series trusts, has actually helped new players enter and survive without the same scale previously needed. Some of that innovation has led to the growth of new products, like ETFs. And industry scale has provided investors with ever-increasing choice, with bigger fund firms launching more new investments and new players regularly entering the business.

MFWire will leave the analysis of the research from a performance perspective to the experts. But there are significant non-performance benefits from scale that the industry should keep in mind and perhaps trumpet.

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