Bigger is better, or so everyone in the fund industry tends to assume, but a recent research report suggest that conventional wisdom may be wrong on this count. According to a report released last month by specialized consulting firm Casey Quirk & Associates, the relationship between fund company size and profitability is weak. However, firm focus and "long-term incentive alignment" both improve operating margins (find the full report on the company website).

The report states flatly that, "scale is not the Holy Grail." After surveying unnamed 20 fund companies with high assets under management (the largest had over $1 trillion in AUM while the smallest boasted a respectable $30 billion), Casey Quirk concluded that there is "little evidence of economies of scale."

"While absolute profits went up with greater assets under management," the report explained, "we observed no relationship between great assets under management and great profit margins...We found that expenses increased at the same rate as assets and revenues."

However, the report did note that some specific types of asset managers, "such as single capability boutique managers and quantitative managers," do get more profitable with size.

Instead, the Casey Quirk report found that focus (either distribution channel or asset class focus) did increase operating margins substantially. Long-term incentives also seemed to correlate with higher operating margins, by increasing investment performance and thus drawing more AUM into the firm. 

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