More Mutual Funds Threatened by Asset Bloat
How you can figure out if a fund is too big.
One of the key challenges for fund investors and fund companies alike is asset growth in mutual funds, although it seems strange to say that with a bear market and the mutual fund timing scandal in the not-too-distant past.
Yet, those problems led investors to focus on a fairly small list of firms that avoided scandal and limited the downside during the bear market. In addition, a six-year-long small-cap rally inspired investors to plow more money into funds that are most sensitive to asset growth. (Small caps are much less liquid, so asset growth can mean that a fund has to move up the market-cap ladder, expand the number of holdings, or accept higher trading costs due to increased market impact.)
How big a problem has asset growth become? To get an idea, I looked at the growth in funds with assets over $1 billion. From the end of 2000 to today, the number of $1 billion-plus funds has grown from 730 to 1,123. (For this count, I excluded multiple share classes so that a fund with A, B, C, and D shares would only count once.) Among small-cap funds, the figure has grown from 36 to 81. 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.
Things To Consider
One way to get a handle on whether a fund has grown too large is to let fund managers' own decisions guide you. A while back, I looked at the median point at which small-, mid-, and large-cap funds closed to new investors. After all, fund managers should have a good handle on their funds' capacity limits. That breakdown works like this: small-cap funds, $800 million; mid-caps, $3 billion; and large-caps, $18 billion.
Using that as a starting point, you should consider a few additional factors to determine if you should ratchet up or down those figures.
In sum, seeing how a fund stacks up on these counts can help you to figure out if you're getting a has-been or a fund with potential.
Last week I asked what fund is the best bet to rebound. Most of you (55%) believe it is Vanguard U.S. Growth (VWUSX). Fidelity High Income (SPHIX) got 22% of your votes, while Putnam New Opportunities (PNOPX) received 14%. American Century Giftrust (TWGTX) came in last with 9%.