Scale does not equal investment success
Large scale investment managers and superannuation funds will not be automatically successful due to their size with performance decreasing as managers move to protect their reputation by increasing investments but decreasing risk in portfolios.
At the same time smaller managers and superannuation funds are not guaranteed to decline in number due to their smaller scale and can offer specialised investments out of reach of larger players according to Jack Gray, executive director at investment consulting firm, Brookvine.
In a recently released research paper Gray stated that while scale benefits accrued in process driven areas such as administration they would eventually plateau and add nothing further in terms of efficiency gains.
He also stated that large scale can begin to have a negative effect as managers seek to secure what they have already gained and not push further ahead.
"Depending on the strategy, diseconomies of scale in active listed equities can occur relatively quickly, probably around $6 billion for a ‘standard' broad-based Australian equities strategy, and perhaps as low as $500 million for some specialised concentrated long-short strategies," Gray said.
"As managers' FUM grow, driven by an all too common identification of size with power and influence and encouraged by asset-based fees, performance tends to fall as a result of greater market impact and of managers protecting their reputation and business by increasing the number of holdings and by decreasing risk."
Gray said this phenomena was well documented and clients also lost out as new managers settled back into the pack.
"In the beginning managers do outperform net of fees, but with growth not only does outperformance decline but the fraction of outperformance clients receive declines even more," Gray said
"With no legacy to lose young funds tend to take more risk and consequently perform better. With age and growth they tend to pull in risk to preserve their business an effect that is likely to hold in all investment areas."
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