Thames River Multi-Capital says smaller funds tend to consistently outperform because they take sufficient risk, unlike many of their bigger counterparts.
In its latest Fundwatch survey, the multi-manager looked at the size and performance of funds in all 33 IMA sectors over three years to September 30.
It found that in two-thirds of the sectors, funds that were below average in size were more likely to have achieved consistent outperformance.
It also found that 61 per cent of the above-average performers across all sectors were smaller than their sector averages.
Thames says there are exceptions to the rule, with managers such as Neil Woodford well known for delivering excellent returns within huge funds but, most of the time, the usual economies of scale work in reverse for fund managers.
Managing big amounts of money consistently well is difficult compared with smaller, more nimble funds, where the fund managers may be creating rather than living off their track records.
In the UK equity income sector, Artemis income was the only big fund out of nine that performed consistently above the sector average.
Thames says this is due to the managers’ common-sense approach to downside risk and flexibility on the investment risk they take.
Thames co-head Rob Burdett says as funds get bigger, stock-specific and market-specific risk tends to reduce as managers struggle to move big amounts of money around certain parts of the market. Risk in bigger funds may also be reduced as investment groups balance the generation of returns with risk management.
Burdett says: “The key message is to be a bit wary of large funds and to check they still contain enough stocks in terms of tracking error bets. Look at the rate of growth in assets and the markets in which they invest.”