The Effects of Fund Size and Industry Scale on Performance in Korea
Authors:   Asia-Europe Perspective Association, Cheong Mun-Kyung , Kim Yong-Hyeon , Han Min-Yeon 
Published: June 2018

The existing literature has advanced two hypotheses about the return to fund size. The first hypothesis is fund-level decreasing return to size (Berk and Green, 2004) and the second hypothesis is industry-level decreasing return to size (Pastor and Stambaugh, 2012). The first hypothesis means that fund’s ability to beat its benchmark declines as the fund size increases. The second hypothesis indicates that fund’s ability to outperform its benchmark declines as the size of fund industry increases. Most empirical studies using U. S. data find the inverse relationship between fund-level return to size (Chen et al., 2004; Yan, 2008; Ferreira et al., 2012), and hence support Berk and Green (2004). More recently, Pastor, Stambaugh and Taylor (hereafter PST) (2015) using U. S. data report the negative relationship between industry-level return to size, and therefore support Pastor and Stambaugh (2012). Particularly, PST (2015) indicates that the extant empirical studies are exposed to two problems of endogeneity bias and finite-sample bias. The first bias results from that skill of fund manager could be correlated with both size and performance, but skill cannot be controlled because it is unobservable. This yields that the simple OLS estimator of the size-performance relation could suffer from an omitted-variable problem. The second bias stems from the positive contemporaneous correlation between changes in fund size and unexpected fund returns. As a result, regression disturbances yield a finite-sample bias in the OLS estimates. The purpose of this paper is to empirically test the two hypotheses. Specifically, this study analyzes the effects of fund size and industry size on performance using PST (2015) methodology in Korea. No existing empirical studies have analyzed the effects like ours.
The samples are 206 equity funds from January of 2003 to December of 2014. The funds are categorized as core equity type, small- and medium-capitalization type, long term investment type, socially responsible investment type, active quantitative, large-capitalization type, high dividends type, value stock type, respectively.
The empirical results are as follows. Firstly, the fund performance declines as fund size increases, which is consistent with most of prior studies using U. S. data and Lee et al. (2009). Secondly, the performance deteriorates as industry scale increases, which is conforms to PST (2015). Thirdly, fund size reports insignificantly negative and industry size remains negative and significant when both fund and industry sizes introduce. Fourthly, while time trend flips from negative to positive, industry scale remains statistically negative. This pattern applies to average fund size and number of funds. However, industry size show negative and significant all the time. Finally, whereas fund age changes from negative to positive, industry size remains statistically negative.
In a nutshell, this paper reports that the fund performance remains negatively related to industry size rather than fund size in any cases, which is consistent with PST (2015). This is the first evidence supporting the second industry-level hypothesis using fund data of Korea. However, the evidences should be approached with care because previous studies are very limited.