Short-Term Performance and Mutual Fund Size

Abstract

We examine the relation between short-term mutual fund performance and fund size around the world. Using a large sample of worldwide equity funds we show that small funds outperform large funds, suggesting diseconomies of scale for the mutual fund industry across countries. We find that fund size shows a significantly negative coefficient using both net returns and Carhart alphas as dependent variables, confirming the evidence that funds show diminishing returns to scale. We also find evidence of a negative fund effect on stock picking ability, which indicates that the smallest funds have superior stock picking skills compared to bigger funds. In contrast, market timing ability exhibits positive size effect, suggesting that the largest the size of the fund, the greater the fund manager´s skills to accurately anticipate the market fluctuations.