Why is it bad for a mutual fund to have too many assets?
April 11th, 2010
I keep reading on morningstar and other finance sites about how "such and such a mutual fund is getting too bloated with assets," and that this is especially a problem for funds that focus on small-cap stocks. And I see that Vanguard and many other companies have closed funds to new investors–even Vanguard’s Windsor II, which focuses on huge corporations, has restricted new investors. Let’s say a mutual fund purchases more that 50% of a company, why is that bad? Isn’t that what Warren Buffet’s Berkshire Hathaway does?
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Posted in Top Rated Mutual Funds | 
Tags: assets, berkshire hathaway, corporations, finance, investors, morningstar, mutual fund, small cap stocks, vanguard, warren buffet, windsor
Basically, the reason is that it becomes harder to "move the needle" as Warren Buffett says. In other words, the more money a particular fund has, the larger any particular position has to be to make an impact on the funds results. A $10 million investment, no matter how well it does isn’t going to have much impact on a $50 billion fund. The larger the fund, the larger the investments needed to make a difference. The larger the minimum investment, the smaller number of choices a particular fund manager has, and theoretically, the less well he’ll be able to do.
The more assets a mutual fund has the more I like it. It means it will never go too high or too low. You don’t want to gamble when it comes to mutual funds. Gamble on a good stock in the market, or on a State of federal Bond Fund.
First, you cannot purchase more than 10% of a company’s stock without stating your intent and filing with the SEC. That may involve a hostile takeover.
I saw a list recently of the top 100 largest mutual funds. I think the smallest on that list was $86 billion. Certainly you want to diversify, and it would be rare where a fund manager would buy 10% of a company’s stock, so with $86 billion, it’s hard to find enough good companies worth investing in.
The small Nasdaq stocks, don’t have enough float (available shares) to make it worth this fund’s time. If they can only spend a few million, why waste their time? Even if the stock doubles in price, it will not effect the bottom line of the fund significantly.
Basic resons;
A. It’s not nimble enough to unwind a large position.
B. Buying a position could siginificantly increase the price of the stock.
C. Acts more like a S&P500 index (which usually has lower expenses.
D. Harder to maintain it’s cap-size (if it specializes in anything other that large cap stocks).
E. Runs out of ideas. Has to pick many stocks that it might not have purchased if it was smaller.