Financial myopia

The following table/chart in the Times contains a wealth of information, much of it hard to get at.

From this, the author concludes that "superior performance of ... a deep-pocketed fund is more the rule than the exception", in other words, that large funds that focus on small cap stocks tend to have better performance than smaller funds.

The proximity of the fund size and stock return data immediately calls for scatter plots.  Below, we discover the author's myopia as the purported relationship between fund size and return only applies to one-year returns.  The further back we look, the less plausible is this conclusion.  In the right chart, I annualized the 3- and 5-year returns, which helps show this point.

The left chart contains connected dots, which is not usually done for scatter plots but I find that the lines help me judge whether a positively sloped relationship exists or not.

In addition, whenever we talk of asset returns, we must also consider risk.  Here, I use a proxy for risk by computing the range of annualized returns.  In the right chart from above, we can roughly see that the separation between the dots is smaller for small funds and larger for large funds.  The left chart below shows this relationship more clearly.  It appears that the large funds may have gotten bigger returns by taking higher risk.

Finally, a typical risk-return chart (above right) seems to say that higher risk has not uniformly been rewarded with higher annualized returns over the past five years.

Reference: "Big Doesn't ALways Mean Bad for Some Mutual Funds", New York Times, Dec 4 2005.