What is the optimal investment team size?

Despite a link between a larger investment team sizes and high levels of outperformance, there is no single team size a fund manager should follow to achieve better returns, according to Zenith Investment Partners.

A study by the firm suggested that although larger teams operating under a specialist structure, tended to bring greater levels of outperformance compared to the alternative characteristics, there were still a number of successful fund managers that did not align with the optimal characteristics as were unsuccessful managers who mirrored the ideal template.

Also, Zenith noted that a positive connection between team size and outperformance was not necessary a linear relationship and that the law of diminishing returns would apply instead, meaning an additional analyst to a team of 35 added less incremental value added than to a team of 15.

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Zenith’s head of equities, Quan Nguyen, said that overall Zenith believed that a team’s ideal structure would need to be aligned with its investment philosophy and process.

Further to that, Zenith’s International Shares sector report, which surveyed global equities fund manager and their performance over the five years to September 2019, found that the average team size increased every year since 2015, with the most significant increase occurring over 2018 when the European Commission’s second Markets in Financial Instruments Directive (MiFID II) was enforced.

MiFID II, which was aimed to increase competition and pricing transparency both inside and outside the European union (EU) by separating of research payments and execution service payments, brought about some key changes for the entire fund management industry.

Some key changes which were a direct result of MiFID II and were identified in the report included:

  • Fund managers were absorbing brokerage costs;
  • Sell-side coverage was in a decline; and
  • Sell-side analysts tended to migrate to the buy-side, leading to larger investment teams.



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