Does Size Matter?

Abstract

Total assets under management, or AUM in industry parlance, represents a prime criterion in virtually every manager search a large institutional investor undertakes today. Managers are typically required to have a minimum level of AUM to be considered in the early stages of any search process—institutional investors face so many agency risks that they usually conclude there is safety in higher numbers. This analysis of the historical impact of portfolio size on the performance of institutional asset management products uses a robust database of approximately 5,000 products that includes all the major public markets asset classes typically used by institutional investors. Accounting for both survivorship bias and backfill bias, the results indicate portfolio size has had a pervasive negative impact on performance across almost all the asset classes examined. Not surprisingly, the more illiquid asset classes (small-cap equities and high-yield bonds) have been the most negatively impacted by portfolio size.