Why is it bad for a mutual fund to have too many assets?
June 2nd, 2009
I keep reading on Morningstar and other finance websites about how “such and such mutual funds are 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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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.