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Outsized: Examining Three Index Returns Since 2009 with a Fund Size Factor

Companies and Markets

By Edward McCormick  |  February 1, 2022

In the two charts presented here, we evaluate the factor of fund size and the effect it has had on recent performance returns in large markets. We used Cobalt Market Data to pull two charts over the last decade: the first examining smaller funds with size under $1 billion and the second looking at larger funds with size over $5 billion. While the data on these large funds is largely concentrated in more recent years and may suffer from a smaller sample size, these charts still capture valuable characteristics of the effect that fund size has on performance.

time-weighted-return-by-style-fund-size-above-one-billion-usd

time-weighted-return-by-style-fund-size-above-five-billion-usd

Note: NA=North America, EUW=Western Europe

Key Takeaways:

  • As shown in these charts, these returns are clearly very similar in the first five years. Across the board, there was positive performance on average, regardless of fund size. Given that this was the early years of the bull market following the global financial crisis, a strong, albeit slightly volatile, performance return makes sense.
  • As we look at the later years, we start to see some patterns emerge. Real estate exhibits the lowest volatility in both graphs and quite similar overall levels of performance. Regardless of size, the charts follow very similar timings of peaks and troughs, as well as in depth of deviation in drawdowns. This indicates that real estate’s consistency in performance is size agnostic. Since real estate is so consistent, its performance should stay constant as fund size is scaled.
  • By contrast, infrastructure and credit show significant deviations between the small and large samples in the later 2010’s. Overall, we see a trend of lower volatility in smaller funds, which may be somewhat explained by sample size. However, there are exceptions such as the sustained drawdown of small fund infrastructure in 2017. This is not present in the large fund plot, which exhibits volatility with an average of a little above 0%.
  • Meanwhile, large fund credit exhibits consistently higher volatility, even through the 2020 drawdown and recovery. Examining these cases, we see that in some styles a size factor can emerge. In more speculative styles such as credit, size can yield economies of scale in performance, but with some leverage-resembling risks. On the other hand, different fund sizes may be operating in different markets as seen in infrastructure’s disjointed performance.

Looking Ahead:

  • As the prevalence of large funds rises, we will see the greater robustness of the data on these firms as volatility will likely drop as sample size increases. Additionally, with the dramatic upswing in M&A over the past year, it is quite likely that we will see significant changes in the volume of larger firms.
  • While real estate will likely continue to be size agnostic, we have seen eight out of the 10 largest infrastructure funds raised over the last five years, demonstrating an impressive push for larger infrastructure investment. That may create a disjointed market from its smaller counterpart that could become further separated as the large fund space increases.
  • For credit, while greater fund size appears to allow greater scaling returns, those same returns may offer some pause to investors seeking safety. Since dampening volatility has not appeared over time, credit funds’ reversions may continue to be most painful at the larger scale.

This article was originally published on the Cobalt website.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.

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Edward McCormick

Associate Content Specialist, Cobalt, a FactSet Company

Mr. Edward McCormick is an Associate Content Specialist at Cobalt, a FactSet Company. In this role, he oversees Cobalt Market Data, working to continually improve the timeliness, accuracy, and scope of the data set to better create fund and market level data visualizations. Mr. McCormick earned a bachelor’s degree in Mathematics and Economics from the University of Massachusetts, Amherst.

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The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.