Many investors feel comforted by owning well established, larger mutual funds that have the “buying power” to perform better. Do larger funds exhibit economies of scale? Not always. While bigger funds have the benefit of reducing expense ratios as operating costs are spread over a larger asset base, issues arise if portfolio managers have trouble making investments suitable to the fund. Though not clearly indicated, a fund may grow to a point that hinders performance, manifesting in returns below historical averages. When this happens, investors can get caught up in an underperforming fund.
A fund like the $260 Billion Growth Fund of America, the largest active mutual fund in the country, may face headwinds as it tries to keep up with the Russell 1000 Growth, which it is underperforming, including year-to-date. The issues are not unique and instead represent a trait inherent in many large, actively managed funds.
The question then becomes, do large funds exhibit economies of scale or Diseconomies of Scale?
Enjoy this Chicago Booth research report and a piece from Investopedia on the topic. What are your thoughts?
~ Brian Kasal- The Leadership Matrix
P.S.- Did you see my last Leadership Matrix post- Is the Stock Market Efficient? What Makes the Market Tick?
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