Do Mutual Funds Change Their Investment Strategies When They Become Large?

I investigate how the effect of a large size influences mutual funds’ investments strategies. In fact, active diversified mutual funds investing in the US equity market change their investment strategy when they become large. Mutual funds become less inclined to small-cap companies, and, surprisingly, less exposed to the market movements. The explanation is following – mutual funds cannot implement the same strategies and generate high returns due to the constraints invoked by the growth. Furthermore, mutual funds that receive the large inflow of capital over a short period change a strategy in the same manner. Not only growing funds change the style when they become large but also shrinking ones that are not large anymore. Indeed, such mutual funds, on average, become more inclined to the investments in recent top-performing companies (winners) and less exposed to the market movements (low volatility strategies). Probably, shrunk mutual funds start implementing their competitive advantage - a wider set of investment strategies available for smaller funds.