When it comes to good fund management, size does matter

Being a good fund manager isn’t that hard, says Merryn Somerset Webb. Have the courage of your convictions, stick to them – and work for a smaller firm.


When it comes to fund management, small is beautiful

I have written before about what makes a good fund manager. The answer is much more simple than you might think. It comes down to having the courage of your convictions and sticking to them.

This shows itself in two things: first, a high active share (a portfolio that is very different to the index and hence to everyone else's); and second, a long holding period the lower a fund's turnover the better it does.

There have been various studies that have confirmed both parts of this argument separately. But now we have one that has looked at them together.

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Today's FT refers to new research from Professor Cremer of Notre-Dame University and Ankur Pareek of Rutgers Business School. It's conclusion as expected is that "highly active funds with long holding periods which do not trade much tend to outperform".

You could make the argument that long holding periods are a function of luck (a stock does well, so the managers hold it), but to me it seems to be a measure of conviction as well as understanding that trading costs are the greatest performance killer there is.

There is, however, one more thing to take into account when you are looking for a fund the size of the management company.

John Authers also points to one more bit of research that shows that investment "boutiques" firms that do nothing but investment management, those with less than £100bn under management, and those run by managers with big positions in their own funds tend to be better than others. They outperform by about half a percentage point a year. That's real money.

Our old friend Tim Price is in the process of launching a fund of funds that only buys into this kind of investment. More on this in a few weeks.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.