Original Research
A Case For Scale:
How the world's largest institutional investors leverage scale to deliver real outperformance
Alexander D. Beath, PhD; Chris Flynn, CFA; Rashay Jethalal, MBA, CFA; Michael Reid, HBSc.
Many large institutional investors hold the belief that they have an advantage over smaller investors on account of their scale. How does that scale equate to an advantage, and does scale really result in better returns? Analysis of CEM Benchmarking’s database of large asset owner cost and performance data shows that the largest institutional investors do add incremental value over and above smaller funds. In particular:
Key findings:
Institutional investors have, on average, been able to deliver returns that exceed fund benchmarks gross of costs. Net of costs, funds with more than $10B (USD) in assets under management have consistently delivered excess returns that are significantly higher than smaller funds with under $1B (USD) in assets under management.
These large funds have been able to achieve these positive results while taking on less active risk than smaller funds.
The advantages of scale most prominently manifest themselves in the ability to implement private assets internally, resulting in much lower overall private asset management costs.
Net of costs, the largest institutional investors deliver more value added than smaller funds in both public and private markets, an advantage driven almost entirely by lower staffing per dollar invested and lower fees paid to external managers.
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