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Morningstar Warns Against Funds Becoming Too Big

A relatively small number of funds have attracted a large share of capital in recent years, and that could mean trouble, according to Russel Kinnel, an analyst with Morningstar.

In fact, in the past six years, the number of funds with more than $1 billion under management has swollen from 730 to 1,123. Small-caps, although they are commonly illiquid and, therefore, most disadvantaged by large influxes of cash, have delivered strong returns for the past six years. As a result, they have been especially popular, with 81 billion-dollar-plus funds trading today, compared to 36 in 2000. "If you thought you were the only one having a hard time finding a good small-cap fund, foreign or domestic, that was still open and not too bloated from assets, think again," Kinnel said.

A survey of the median dollar value at which funds close to new investors shows that the figure for small-caps is $800 million, for mid-caps, $3 billion, and for large-caps, $18 billion. If an investor is considering a fund that has assets approaching any of these thresholds, Kinnel suggests that they look at indicators such as turnover, research and the individual fund manager's other commitments. If funds are trading at a high volume and are approaching any of these median-closing levels, beware, he said. Also, fund managers who have few analysts or little support may not have adequate research to make timely decisions.

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