Mutual Fund Performance: Does Fund Size Matter?

Fund size (net assets under management) affects mutual fund performance. Mutual funds must attain a minimum fund size in order to achieve sufficient returns to justify their costs of acquiring and trading on information. Furthermore, there are diminishing marginal returns to information acquisition and trading, and the marginal returns become negative when the mutual fund exceeds its optimal fund size. In a sample of 683 nonindexed U.S. equity funds over the 1993-95 period, we found that 20 percent of the mutual funds were smaller than the breakeven-cost fund size and 10 percent of the largest funds overinvested in information acquisition and trading. In addition, we found that value funds and blend (value-and-growth) funds have more to gain than growth funds from these information activities.