Opinion Divided Over Correlation Between Fund Size And Performance

by Carla Johnson, Investors Offshore.com

13 August 2001

Analysts are undecided as to whether the size of a mutual fund has a detrimental affect on performance, as the conflicting findings from two different studies revealed recently.

Fund companies seem to feel that it does, and many are upping the ante in order to discourage large numbers of new investors from jumping onto the bandwagon, or are simply closing their doors altogether. Vanguard, for example, recently announced that it had raised the minimum initial investment in its Select Value Fund to $25,000 because of worries that rapid growth would compromise its returns, and the Janus Fund and Fidelity Magellan have been closed to new investment for several years.

The findings of the review of short term performance conducted by the mutual fund research group Financial Research Corp., seemingly confirm the fund companies fears. Using data from between 1988 and 1998, but breaking this up into performance over a 12 month increment, the study found that approximately 87% of the time, smaller funds outperformed the average, compared to only 47% of the time for larger funds.

However, the Wiesenberger Thomson Financial Report, which used data collected as of October 2000 showed that although the larger funds stumbled in the short term, they generally came out on top when the results were viewed from a longer term perspective, say five or ten years. Ramy Shaalan, an analyst with Wiesenberger Thomson says that it is difficult to draw any broad conclusions about why this should be so, however. 'It's like the question about which came first, the chicken or the egg?' he puzzled. 'Are bigger funds better because the funds were better to start with and grew because of that, or is it the other way around? Are they better because they're big?'

Some experts believe that the health of the markets is more important than the size of the funds. Jeff Tjormehoj, a Lipper Research analyst speculates that the reason the small funds perform better in the short term, and large funds in the long run is because being more nimble, the former can react more quickly to market downturns and upswings in a bull market, whereas in bearish conditions larger funds weather the storm better because of superior research abilities and lower fees due to scales of economy.

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