I mentioned at the start of this letter that we had been shortlisted for two prestigious awards. We were nominated in two of 18 categories, which I thought was very impressive for a firm of our size. As I thought about size, I wondered where we ranked in the world, and came across a list of the top 400 fund managers by AUM compiled by Investment & Pensions Europe. We were not on it – the 400th largest was 20 times bigger than us – so I wondered if I could extrapolate the numbers to estimate where we stood. What revealed itself was fascinating.
"Blackrock had better watch out"
I plotted AUM against firm size rank and added a power law trend line (Chart 1). The trend line didn’t fit very well, so I tried an exponential trend line. That didn’t work very well either (Chart 2) but I wondered if the biggest companies followed a power law and the next biggest followed an exponential pattern. The results were extraordinary (Chart 3). The top 65 companies clearly follow a power law, and the next 365 an exponential pattern.
I would welcome suggestions from readers as to why this might be the case. And I’d be keen to collaborate on a research paper if there are academics out there with time on their hands!
For further reading on the subject of power laws in relation to size ranking, whether fund managers or cities, see Power Laws in Economics - An Introduction2.
Incidentally, the equation for the exponential trend line in Chart 3 that relates to the lower ranked companies can be reworked as:
Firm rank = 556 – 91.5 times the natural logarithm of AUM
At the end of December 2016, we had AUM of £300 million, which translates to US$370 million. Plugging this into the above equation reveals that (drum roll) we are the world’s 647th largest fund manager.
Blackrock had better watch out. We’re a-comin’ to getcha!
Published in Investment Letter, August 2017
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.