How Does Size Affect Mutual Fund Behavior?




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    • Pollet is from Goizueta Business School, Emory University. Wilson is from the Department of Finance, Hong Kong University of Science & Technology. We thank Keith Brown, Laurent Calvet, John Campbell, Kalok Chan, Randy Cohen, Joshua Coval, Rafael Di Tella, Andre Perold, Jeremy Stein, Luis Viceira, Eric Zitzewitz, and an anonymous referee as well as seminar participants at Chinese University of Hong Kong, Harvard University, Hong Kong University of Science & Technology, Singapore Management University, University of Illinois at Urbana-Champaign, and the 2006 Western Finance Association Annual Meeting for their comments.


If actively managed mutual funds suffer from diminishing returns to scale, funds should alter investment behavior as assets under management increase. Although asset growth has little effect on the behavior of the typical fund, we find that large funds and small-cap funds diversify their portfolios in response to growth. Greater diversification, especially for small-cap funds, is associated with better performance. Fund family growth is related to the introduction of new funds that hold different stocks from their existing siblings. Funds with many siblings diversify less rapidly as they grow, suggesting that the fund family may influence a fund's portfolio strategy.