Big Funds are Not Beautiful, says Academic Study

If you want to keep outperforming, stay—or become—small.

(June 19, 2014) — Loading capital in to the largest funds may mean cutting back on your alpha potential, a study published by London’s Cass Business School has claimed.

David Blake, founder of the university’s Pensions Institute, Tristan Caulfield of City University London, and Christos Ioannidis and Ian Tonks from the University of Bath, pooled their expertise to study the effect of funds—and other significant factors—on its performance in a paper entitled “Improved Inference in the Evaluation of Mutual Fund Performance using Panel Bootstrap Methods”.

“Using a dataset of UK equity mutual fund returns, we find that fund size has a negative effect on the average fund manager’s benchmark-adjusted performance,” the paper said.

The authors created a new framework through which to measure fund performance, arguing that the current standard set-up omits factors that are essential for investors to consider.  It also used a universe of funds free of survivorship bias, by including those that were both created and liquidated between January 1998 and September 2008.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

Performance and management fees were deducted from final figures but entrance and exit were not counted.

“The coefficient on fund size is negative and highly significant indicating that increasing fund size has a material effect in lowering a fund’s performance,” the paper said.

The paper’s authors examined the effect of most highly educated managers coming into the largest fund groups and found they rarely outperformed in this environment. In fact, the move usually had a detrimental effect.

“Once we control for fund size and other fund-specific factors—in particular, family fund size—the average fund manager’s alpha for both gross and net returns is insignificantly different from zero,” the authors said. “This implies that if better qualified managers do manage the largest funds in the largest fund families—which is entirely plausible—they do not appear to deliver outperformance: in other words, the size of the fund overwhelms any superior skills they might have.”

The authors suggested that successful funds, which received increasing levels of inflows, should consider splitting in order to maintain results.

“Since the most likely explanation for the negative relationship between fund size and performance is the negative market impact effect from large funds attempting to trade in size, this suggests that funds should split themselves up when they get to a certain size in order to improve the return to investors.”

Related content: How Big Do Investors Want their Hedge Funds? & Golden Lining in Miserable Month for PIMCO

Towers Watson Appoints CIOs in Step Towards Asset Management

Craig Baker and Chris Mansi are taking on newly-created roles at the consultancy giant.

(June 18, 2014) – Towers Watson has appointed two CIOs in a move which adds to the consultancy giant’s asset management capabilities.

Craig Baker has been handed the newly-created role of global CIO, while Chris Mansi has taken on the same position for Towers Watson’s “delegated clients”, including those using the firm’s outsourced CIO offering.

Together the pair will share responsibility for more than $60 billion in assets under management and $2 trillion in assets under advisory.

Mansi—who has worked at the group for 15 years—previously led the group’s fiduciary management arm, and will now take charge of its wider outsourcing business.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

Baker was previously Towers Watson’s head of research, and has been at the company for 20 years in various roles.

Chris Ford, global head of investment at Towers Watson, said the global CIO roles would “bring together all of our research and portfolio construction resources”. Baker will also have responsibility for the group’s investment philosophy.

The appointments are the latest in a number of staff changes at Towers Watson this year. In March Steve Carlson was promoted to head of investments for the group’s Americas business, replacing the departing Chris DeMeo. Ed Francis took charge of the European investment arm in the same month following Chris Ford’s promotion to global head of the investment business.

«