Smaller Fund Outperformance – It’s Not Just Mutual Funds
May 30, 2007
The bigger a mutual fund gets, the harder it is to outperform. This relationship is why we created our “Fat Fund Index” back in 1999. As it turns out, managing too much money hurts other types of investment portfolios as well.
According to a segment on CNBC this morning, Thomson Financial did a study showing that private equity returns over the last 15 years have run an average of 15.9% a year for smaller funds (less than $1 billion under management) compared to just 11.6% a year for larger funds (over $1 billion). For private equity funds that specialize in startups – venture capital funds – the outperformance is even greater: 23.1% vs. 15.5%. Private equity funds are funds with fewer restrictions on their investments and catering to institutional and high net worth investors – those that the SEC thinks can look out for themselves.
Mutual funds invest almost exclusively in the stocks of publicly traded companies, which tend to move as a group. Private equity funds often take stakes in private business – ones that do not sell shares to the public. The private equity funds that invest in startups see the biggest performance boost from being small because they can invest in smaller startups that have the biggest upside potential. Apparently giant funds have had to pass on too many good small deals.
For mutual funds the benefit of being small also increases as fund managers look to smaller companies to buy. Having $2 billion under management may not hurt a fund that invests in U.S. large cap stocks, but it can be a big drag for small cap or emerging market oriented funds.
Our Fat Fund Index (available on most fund data pages here on MAXfunds.com) adjust for this moving target issue. Check a few of your favorite ticker symbols in our fund-o-matic and see for yourself.
The bigger a mutual fund gets, the harder it is to outperform. This relationship is why we created our “Fat Fund Index” back in 1999. As it turns out, managing too much money hurts other types of investment portfolios as well.
According to a segment on CNBC this morning, Thomson Financial did a study showing that private equity returns over the last 15 years have run an average of 15.9% a year for smaller funds (less than $1 billion under management) compared to just 11.6% a year for larger funds (over $1 billion). For private equity funds that specialize in startups – venture capital funds – the outperformance is even greater: 23.1% vs. 15.5%. Private equity funds are funds with fewer restrictions on their investments and catering to institutional and high net worth investors – those that the SEC thinks can look out for themselves.
Mutual funds invest almost exclusively in the stocks of publicly traded companies, which tend to move as a group. Private equity funds often take stakes in private business – ones that do not sell shares to the public. The private equity funds that invest in startups see the biggest performance boost from being small because they can invest in smaller startups that have the biggest upside potential. Apparently giant funds have had to pass on too many good small deals.
For mutual funds the benefit of being small also increases as fund managers look to smaller companies to buy. Having $2 billion under management may not hurt a fund that invests in U.S. large cap stocks, but it can be a big drag for small cap or emerging market oriented funds.
Our Fat Fund Index (available on most fund data pages here on MAXfunds.com) adjust for this moving target issue. Check a few of your favorite ticker symbols in our fund-o-matic and see for yourself.