GLOBAL - Most investment funds are too big to provide active managers with the flexibility needed to outperform the benchmark significantly, new research suggests.

According to a study conducted by German investment manager Sauren Fonds-Service "the larger the assets under management in a fund, the lower the expected outperformance".

The fund of fund manager's research team looked at various studies on the performance of active managers and found "on average - considering all costs - active fund management does not yield exceptional returns".

One of the reasons identified by Sauren Fonds-Research for underperformance of funds was the influence large buying or selling transactions has on the market.

According to Sauren, large funds could therefore only hold a limited share of a security and this in turn leads to the investment being 'dumped' from the portfolio because the small share does not warrant the research costs.

Certain holdings are also rendered uninteresting by legal regulations capping the shareholding a single investment fund can hold in a security, the fund research team also found.

Furthermore, large transactions often take a long time to trade.

"A fund manager with a limited number of assets under management can act more flexibly and can place transactions in time," Ansgar Guseck, chairman of the Sauren research team, commented.

This research comes as more and more institutions are switching from active to passive mandates in an attempt to reduce costs and follows evidence presented by 2006 Mellon CAPS pooled pension fund survey earlier this year which came to a similar conclusion.

"Investment funds with a high level of asset inflow are increasingly positioned more towards index-tracking," Guseck noted.

He added managers also tend to invest more in companies with a high market capitalisation which normally have a higher weighting in the benchmark.