Two funds pursuing an almost identical investment strategy — say, tracking the same global index — can sometimes carry noticeably different ongoing charges, and one of the reasons for this, beyond simple pricing decisions by the fund manager, is the sheer size of the fund itself. Larger funds often benefit from economies of scale that allow them to spread fixed costs over a bigger pool of assets, and this dynamic is worth understanding both when comparing similar funds and when thinking about how a fund's charges might evolve over its lifetime.
What economies of scale mean for a fund
A fund incurs a mixture of costs to operate: some that scale roughly in proportion to the fund's size (such as certain trading costs), and others that are largely fixed regardless of whether the fund holds £10 million or £10 billion (such as the cost of the underlying research, legal and administrative infrastructure, custodian and depositary fees for maintaining the overall structure, and the fund's basic operational overhead). As a fund grows, these largely fixed costs are spread across a larger asset base, meaning the cost per pound invested tends to fall — assuming the fund manager passes some or all of that saving on to investors through a lower OCF, rather than retaining the full benefit as additional profit.
Why passive tracker funds show this pattern particularly clearly
Economies of scale tend to be especially visible among passive index tracker funds, because their underlying strategy (replicating an index such as the FTSE 100, FTSE All-Share, S&P 500, or MSCI World) is largely mechanical and does not require the same scale of dedicated research staff that an actively managed fund employs. A very large tracker fund's marginal cost of managing an additional pound of assets is relatively low, which is one reason the largest index tracker funds in the UK market often carry some of the lowest OCFs available, sometimes below 0.10% a year, while smaller or newly launched tracker funds pursuing a similar strategy can carry a noticeably higher OCF simply because their fixed costs are spread across a smaller asset base.
Actively managed funds and scale
The relationship is less straightforward for actively managed funds, since research and portfolio management costs scale to some degree with the complexity and size of the portfolio being managed, and very large actively managed funds can face their own challenges (sometimes called "capacity constraints"), where a strategy that worked well at a smaller size becomes harder to execute effectively once the fund needs to deploy very large sums without unduly moving the price of the underlying investments it buys. This means economies of scale in fee terms do not automatically translate into an ever-improving experience for investors in every respect as an actively managed fund grows.
A worked hypothetical example
Suppose two hypothetical global tracker funds pursue the same broad strategy, but differ substantially in size.
| Fund | Approximate fund size | OCF | Annual cost on £25,000 |
|---|---|---|---|
| Fund A (larger, more established) | £8 billion | 0.08% | £20 |
| Fund B (smaller, newer) | £40 million | 0.28% | £70 |
In this hypothetical, the smaller fund's OCF is more than three times higher than the larger fund's, resulting in £50 more in annual charges on the same £25,000 investment, despite both funds pursuing what is described as a similar underlying strategy. Over a long holding period, and accounting for the compounding effect that a lower charge has on investment growth, this gap could plausibly widen into several thousand pounds of difference over multiple decades. This example is entirely illustrative, built to demonstrate the general pattern, and does not represent any specific real funds, whose actual sizes and charges vary and should always be checked directly.
When a smaller fund might still make sense despite a higher charge
A higher OCF on a smaller fund does not automatically make it the wrong choice in every circumstance. There are legitimate reasons an investor might still consider a smaller or newer fund:
- It may pursue a genuinely different or more specialised strategy not available in a larger, more established fund (for example, a fund focused on a specific theme, sector, or smaller company universe where large-scale tracker equivalents are less common).
- It may be newly launched by a manager expected to grow it substantially over time, potentially reducing the OCF as it scales, though this is speculative and cannot be guaranteed.
- Fund size is only one factor among several — investment strategy, risk profile, and suitability for an investor's overall portfolio generally matter more than cost alone when the funds being compared are not pursuing genuinely similar strategies.
Fund closures and share class mergers
The economies-of-scale dynamic works in reverse too: a fund that shrinks significantly over time — perhaps because of sustained outflows as investors move their money elsewhere — can see its fixed costs spread across a smaller asset base, sometimes leading a fund manager to increase the OCF, merge the fund into another larger fund with a similar strategy, or close it entirely. Investors holding a fund that has shrunk substantially in size since they first invested may wish to check whether its OCF has crept up over time as a result, since this is a scenario where periodically reviewing an existing holding's current charges (rather than assuming they remain the same as when first invested) can be particularly worthwhile.
How to check a fund's size and recent OCF trend
- Fund factsheets typically publish the fund's total assets under management (sometimes called "fund size" or "net asset value"), updated periodically (often monthly).
- Comparing a fund's current factsheet against one from a year or more ago (where available through a platform's historical documents or an independent data provider) can reveal whether the fund has grown, shrunk, or had its OCF changed.
- A fund's Key Investor Information Document (KIID) or successor disclosure document states the current OCF directly, and is reissued periodically as figures are updated.
Economies of scale within a tax-efficient wrapper
Because funds are commonly held within a Stocks and Shares ISA (annual allowance £20,000) or a SIPP (annual allowance £60,000, or 100% of earnings if lower, tapered for high earners), the effect of a lower or higher OCF compounds over long holding periods free of further UK tax on the resulting gains, which is a further reason the fund-size and cost dynamic described here is particularly relevant for money intended to be held for many years within these wrappers, rather than a short-term consideration alone.
How fund managers sometimes structure fees to reflect scale directly
Some fund managers build the economies-of-scale effect explicitly into their charging structure, rather than leaving it to periodic discretionary reductions. This can take a couple of forms worth being aware of.
Tiered fee structures within a single fund
A small number of funds apply a tiered OCF that automatically reduces once the fund's total assets under management cross certain published thresholds — for example, a slightly lower charge applying to the whole fund once it exceeds £500 million, and a further reduction above £1 billion. Where this structure exists, it is disclosed in the fund's prospectus, and investors benefit automatically as the fund grows, without needing to switch share class or take any action themselves.
Separate share classes for different investment sizes
Other fund managers instead offer entirely separate share classes at different minimum investment levels, each with its own fixed OCF, rather than a single share class with a built-in tiering mechanism — for instance, a standard retail share class alongside a lower-charging class available only above a much higher minimum investment. This is a different structure from the fund-size effect discussed above, since it relates to the size of an individual investor's holding rather than the size of the fund as a whole, but the two are sometimes conflated and are worth distinguishing clearly when reading a fund's literature.
Why this matters when comparing a new fund against a long-established one
A newly launched fund, even one run by an experienced and well-resourced fund manager, will generally start with a smaller asset base than an equivalent long-established fund from a competitor, simply because it has not yet had time to attract significant assets. This means a straightforward, like-for-like comparison of a brand-new fund's initial OCF against an established competitor's current OCF may not fully reflect where the new fund's costs are likely to settle once (and if) it reaches a comparable scale. Some fund managers publish an estimated OCF for a new fund based on projected size, which is worth checking explicitly, rather than assuming a currently small fund's OCF will necessarily stay exactly where it started.
Key takeaways
- Larger funds can often spread largely fixed operating costs across a bigger asset base, which can allow — though does not guarantee — a lower OCF than a similar, smaller fund.
- This pattern is particularly visible among passive index tracker funds, where the largest funds in the UK market often carry some of the lowest available OCFs.
- Actively managed funds face a more complex relationship between size and cost, since very large active funds can encounter capacity constraints that affect strategy execution, separately from any fee benefit of scale.
- A fund that shrinks substantially over time can see its OCF rise as fixed costs are spread across a smaller base, making periodic review of an existing holding's current charges worthwhile.
- Fund size and OCF trends can be checked via factsheets and Key Investor Information Documents, comparing current figures against historical ones where available.
- Cost is only one consideration among several when comparing funds of different sizes pursuing genuinely different strategies — not a reason on its own to dismiss a smaller, more specialised fund.