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Good Things Come in These Small (Fund) Packages

Smaller funds have a sizable advantage over their large counterparts when it comes to changing direction.

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Sometimes in investing, size does matter, but that doesn't mean bigger is always better. In fact, sometimes the Davids have advantages over the Goliaths.

For example, let's say the manager of a $50 billion fund wants to reposition his or her portfolio, adding a greater allocation to foreign stocks. Each 1% shift in allocation represents a $500 million shift in assets into whatever foreign companies the fund manager finds attractive. Such a large move into a handful of stocks is likely to make waves in the companies' stock prices, potentially making the shares more expensive in the process. Now multiply that effect by 5 or 10 times to represent a substantial shift in the fund's foreign-stock allocation, and you'll start to understand why the biggest funds, like the biggest ships, take great effort and planning to chart a new course.

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Adam Zoll does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.