Does size matter while investing?
We keep hearing in our conversations about size does matter. What we mean is that someone or something big has a capacity to deliver big.
We keep hearing in our conversations about size does matter. What we mean is that someone or something big has a capacity to deliver big. We also parallel being big to being good, especially when we mention about the companies and their products.
We instantaneously extend the trust on to their services or products just because of the company being big. We tend to represent big with larger or greater achievements and so size invariably occupies a bias in our minds. We equate big with better most of the times.
So, would that be true in case of investments? This is not completely true in mutual fund investments i.e. the size of the fund being as the better performer or vice versa.
Yes, there is a counter argument that it is because of the better performance, investors flock to this fund and so over a period of time accumulate larger corpuses.
So, a fund with larger assets under its management is considered as a reckoner of consistent higher past performance. This is very misleading as not all best performers are of large size or all larger funds have great performance record.
This is another belief similar to that of the higher NAV and its performance however that discussion is for another day.
Of course, investors' bias towards big and seen as inherently good, assume that could attract more money doesnot stand the scrutiny in reality.
Research however shows that it's not a compelling trend to call that being big makes the investments to do good or vice versa.
If we peer into data, there are some very good performing funds which have remained small and some very lousy funds which have large assets under them. One shouldnot fall into this trap and make decision of investments accordingly.
When funds with stellar consistent performances stay for long periods would attract more money and thus grow bigger. This fits the argument of they were good and so they became large.
Though, the opposite is not certainly true as not all large funds have better performances. One needs to also consider instances of where the fund is merged with another fund either due to the regulatory changes or the fund house felt it's economical or redundant to operate as different funds.
The former happened last year when the Securities Exchange Board of India (SEBI) categorised the MF with their guidelines. There were many funds which were merged with other funds of the same fund house to accommodate to the newer guidelines.
In many of the cases, the fund objective has been completely stripped off to fit into an existing one with compliance to the regulations. Overnight, some obscure funds became large within their fold without enhancing any performance benefits to the investors.
True, there were instances across the global and domestic mutual fund industry where the funds were closed for future subscription sighting the excess flow of money beyond that could be managed.
For instance, the Fidelity's Magellan fund became the largest fund with over $100billion in assets under management (AUM).
Around that time the fund had stopped fresh subscriptions from investors and allowed it back after about a decade. Of course, it was one of the best performing funds in that period but there were other performing ones at par but with lower AUMs.
The size of the fund could not be just purely from the performance.
There were times when investors flocked to the fund as investment philosophy suited the market environment particularly around the New Fund Offering (NFO) coincided with the overall market peak could lead to higher AUM of the fund. Its not necessarily true that small funds have lesser performance.
There could be an advantage of investing in large funds that is the expense ratio is lower compared to smaller sized funds due to Sebi's diktat. This could mean the investor could eek out an additional return due to lower costs.
On the contrary, larger funds have some disadvantages especially of those who have exposure to mid and small cap oriented stocks.
This category of stock has low liquidity and when there is a high volatility, the large funds have difficulty in liquidating the asset while the value erodes simultaneously, impacting the NAV and thus the performance of the fund.
(The author is co-founder of "Wealocity", a wealth management firm and could be reached at firstname.lastname@example.org)