WARREN INGRAM: Size really matters in unit trusts

Larger funds are generally more efficient in managing their trading costs. Picture: 123RF/DZIANIS APOLKA

There are many opposing theories about the influence of fund size on performance. Some argue that a smaller fund is better because it can be more agile and flexible, whereas a larger fund might be too ungainly and difficult to manage. This is particularly relevant in SA, where the number of shares on the JSE is declining constantly and so investment choice is increasingly limited.

Horstmeyer also looked at funds that invested in non-US shares and found that larger funds beat smaller funds by 0.8% per year over five-year periods. I thought the research from the US was so compelling that I looked at a few return comparisons in SA to see what is happening here. The category of unit trusts that invests in shares is called general equity. I looked at the growth of the largest general equity unit trust, which has been in existence for 10 years — as has the smallest fund.

Out of interest, I also looked at the best-performing fund over 10 years. It wasn’t the biggest fund in the category but it was sizeable. However, the three worst-performing funds over three years were all small funds and the worst performer was the smallest. My comparison is certainly not an academic study, but it does show the same type of trend as observed in the US.In his research, Horstmeyer found a few reasons for the difference in performance.

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