FUND SIZE AND ABNORMAL RETURNS IN

Market sentiment, popular press and the academic fraternity all seem divided on the issueof whether a fund’s asset base affects its performance such that the delivery of aboveaverage market returns is impacted.A historical simulation was employed in constructing hypothetical active portfolios ofvarying asset sizes for each of the years, 1991 to 2005. The portfolios consisted of 40randomly selected stocks; chosen from an investment universe made up of the top 160listed shares on the JSE, based on market capitalisation. Each portfolio was simulated a1,000 times per fund size, per simulation year.The results of the simulation indicated a fund’s size to be a contributing factor to itsperformance with market/stock liquidity the underlying reason for this relationship. Activemanagement at the larger end of the fund size spectrum is ineffective such that a portfoliomanager’s stock picking ability is severely compromised resulting in average or belowaverage performance results. Related to this non-performance, large fund managers arenot likely to earn out-performance management fees.The relevance of these findings to the South African fund management industry is for largefunds to stop their active betting taking and to switch to passive investment strategies.Further, to alter their current out-performance management fee structures accordinglySmall to medium sized portfolio managers must be aware of the size effect ensuring thattheir funds are ‘capped’/closed to inflows when their asset base starts to constraint theiractive positions