Equity Fund Size and Growth: Implications for Performance and Selection

Abstract

Should individuals choose the largest or smallest equity funds for investment? This study explores the relationship of equity fund size to performance. Historical returns of large funds are found to be superior to their smaller peers. Yesterday's best performing funds tend to become today's largest funds as individuals invest heavily in response to the communications about the fund's past success. But the findings suggest that, once large, equity funds do not outperform their peers. Especially for funds in aggressive growth objectives, the advantages of being small appear to outweigh the disadvantages. For individual investors with aggressive growth objectives, a strategy of investing in smaller funds may thus be wealth maximizing.

JEL Classification: G31