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Zakri Bello

Central Connecticut State University, USA


Jerome J. DeRidder

Salisbury University, USA


We used three measures of portfolio performance to examine a large sample of domestic equity mutual funds, which has substantial variability in the size of assets under management. Over the study period, February 1990 to January 2010, we find that the average mutual fund outperformed the stock market as represented by S&P 500 index. Our findings are in line with the larger number of previous studies that reported a positive relation between fund size and portfolio performance. All three measures of portfolio performance tell us the same story, thus reinforcing one another.

We examine the portfolio performance again, by focusing on two separate periods marked by extreme market movements. The period from January 2003 to September 2007 was marked by excessive investor exuberance and the stock market rose substantially. The October 2007 to January 2010 period, on the other hand, was marked by extreme pessimism on the part of investors and the stock market declined appreciably. The results for the depressed years are substantially worse than those for the 2003 to September 2007 period, as indicated by the fundís excess returns.

However, when we adjusted the portfolio performance for market risk, the portfolio performance during the depressed years turned out to be remarkably better irrespective of the size of funds under management. Further, in each of the two sub-periods and for the sample as a whole, performance improved with the size of assets under management, suggesting that economies of scale indeed exist in mutual operations.

Key words: Equity Mutual Funds, Performance Evaluation, Portfolio Selection, Fund Size

JEL Codes: D02, G11, G12, G23, M21, N20