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Fund Size


As it turns out, size does matter. The asset level of a mutual fund is something that is closely looked at by financial planners and advisors. While companies often tout their total assets under management, having an abundance of assets in a single fund tends to turn advisors away. The worry is not lower returns necessarily, but rather a divergence from investment objectives. Consequently, it's important for marketers and wholesalers to communicate the size of the fund they are selling and what the firm will do if it gets too big, according to advisors.

"We are always looking at asset levels before we decide whether to buy a fund," said Diane Pearson, a financial advisor with Legend Financial Advisors of Pittsburgh. "It is one of the more important factors in making a decision about a fund."

There are multiple theories about how size can affect a fund's performance. Earlier this year, Wiesenberger (Wiesenberger is owned by Thomson Financial, publisher of MFMN) produced a study on the topic, which showed that smaller funds are able to operate easily and quickly during market downturns and over short time periods, but larger funds outperform in the long run. Still, the report concedes, "it's hard to determine to which degree size affects performance, since it's virtually impossible to isolate and account for all factors that contribute to performance before and after a fund gets big."

Bloated Fund Concerns

One concern about large funds is that it becomes difficult for the managers to take a position in a stock without affecting the price. "We want to make sure that a fund we're in stays reasonably close in assets to where we bought it," said Pearson. "If it starts to get into the multi-billion dollar range, we worry how effective managers will be in selecting new investments or adding to current positions because the more money that's in a fund, the more likely it is to move the market with any action."

For that reason, an advisor's biggest concern regarding a fund's asset size is with small- and mid-cap funds, she said. Because small-cap stocks trade at much lower prices, it can be difficult for huge funds to hold minor positions and be selective, and it is much more likely that the movement of the fund will move the market, said Jeff Daniher, a financial advisor in Cincinnati. "In a small or mid-cap fund, big size can be a detriment for a fund," he said. "I'm very cognizant about a small-cap's asset size when recommending them to clients."

Controlling Size By Closing

One thing advisors are vigilant of is whether investment companies close funds to investors when they get too big, said Daniher. "I would much rather a fund close, even though I wouldn't be able to buy any more of it, than to continue operate at the larger size," he said. If the stocks in a small-cap fund go up, before long they could become mid- or large-caps and, in order to avoid style drift, the fund would have to replace those stocks with other small-caps. "One of the worst things a fund can do is deviate from its style box because it's chasing performance," said Daniher. "We can't control that on behalf of our clients, so it's something we have to be on the lookout for."

There is no ideal size or strict maximum that advisors use, according to Pearson. The average asset level of a small-cap fund is $170 million, according to Lipper, but there are many funds that operate successfully and within their style-boxes with higher asset levels. Since there are no set levels, what advisors want to know is how big the manager will let the fund get, and that can be communicated when its being sold, said Wayne Firebaugh, a financial advisor in Roanoke, Va.

"It's important that a fund company demonstrate that it's responsible to its investment style," said Firebaugh. "Several fund companies have publicized that they will close a fund at a certain level of assets, and that can really help from a marketing perspective," he said.