Does the size of a fund and its performance correlate? Here is a closer look at Investment Association sectors
If you were to shop for a loaf of bread at a local corner shop rather than a supermarket, it would be logical to think a lack of choices would see sales of certain brands dominate, whereas in the supermarket where your options are expanded, it would be more evenly distributed. But can we apply this same argument to mutual funds? Should we expect to see sectors with limited choice have a few funds hoovering up most of the total assets under management?
To test this hypothesis, it is pertinent to choose a mutual funds universe that is split into sectors.
We have selected the Investment Association universe and leveraged FE’s data to compare the top 10 individual fund sizes against the total size of the sector. In addition, we have avoided either those with non-like-for-like instruments, such as the IA Specialist, or those whose number of funds are so constrained it would be foolish to attempt to interpret the results.
For equity instruments, there is a positive correlation. It appears that the greater the offerings a sector has available, the less likely it is for a few funds to dominate assets.
In this exercise, IA Global had the most diverse spread of assets, with Fundsmith Equity controlling just under 9 per cent of total assets.
Conversely, IA Europe Smaller Companies ended up being the most skewed, with soft-closed Barings Europe Select Trust representing a huge 23 per cent of the sector AUM.
It was interesting to observe this correlation breakdown for non-pure equity sectors. For example, IA Absolute Return contains both a similar amount of funds and total AUM size to the Emerging Markets bucket, but just 10 absolute return funds hold 64 per cent of total assets – significantly more than EM.
Within the Sterling Bond space, Pimco dominates. Pimco GIS Income alone accounts for 44 per cent of total AUM for the IA Sterling Strategic Bond sector.
Overall, a few observations could also be made looking at the data. Those funds which have risen to the top in terms of size were not purely large fund houses backed by strong marketing.
Unsurprisingly, most of the active equity funds with the largest assets tended to historically outperform sector peers over the long term.
However, not all could be linked purely to performance. For example, Robeco QI Emerging Conservative Equities, a fund which invests in low-volatile stocks to reduce downside risk, is the third-largest EM fund.
Thematic funds proved popular with investors, as Pictet Global Megatrend and five-crown-rated Pictet Water both appeared in the top 10 largest funds within IA Global.
Finally, passives had a strong presence across most sectors. For example, the IA UK All Companies 6/10 largest funds were either index funds or trackers and, between them, represented £68bn of assets within this space.
Ahmed Mohamoud is research assistant at FE