Experienced Manager, Svelte Fund: A Winning Formula?
The advantage usually goes to the small fry when it comes to fund returns.
At the Morningstar Investment Conference in late June, a conference attendee asked Ken Feinberg whether investors are better off buying Selected American (SLADX) or Clipper Fund (CFIMX), both of which he comanages with Chris Davis. "Clipper," Feinberg replied, "because it's smaller."
Few managers are quite as candid as Feinberg when it comes to assessing whether size makes a difference in their funds' performance. And we'd acknowledge that it's impossible to set hard-and-fast guidelines about how big is too big when it comes to fund size. For example, American Funds Growth Fund of America (AGTHX), with $184 billion (!) in assets, would seem to be exhibit A in any discussion of bloated funds. However, the firm's multimanager structure has bought it a bit more breathing room than a single-manager fund would enjoy, and performance has continued to thrive. Similarly, Davis and Feinberg's low-turnover approach has helped their funds grow large more gracefully than higher-turnover funds could do.
All things being equal, however, it's hard to dispute that it's easier to run a small fund than a big one. That's why we've often called for bloated funds to close, as Russ Kinnel did just a few months ago in this article. For proof that trees don't grow to the sky, one need look no further than fund pairs--one large, one smaller--run by the same manager. Although the timing of cash flows and strategic differences account for some of the performance differential, in most cases the smaller fund's performance has trumped that of its larger relative. Here are some prominent examples.
Christine Benz has a position in the following securities mentioned above: SLADX. Find out about Morningstar’s editorial policies.