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Size matters, or does it? - Views on News from Equitymaster
 
 
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  • Dec 15, 2000

    Size matters, or does it?

    Are bigger funds at an advantage over their smaller counterparts? Most investors seem to believe that the bigger the fund, the higher will be its returns. Thatís not necessarily true.

    A supple and lithe boxer has the advantage of agility and nimbleness on his side. With this, he can overcome a very heavy and bulky opponent. Although the heavier boxer prides himself because of his weight and physique, his very weight proves to be his undoing. He finds his bulk too unwieldy and clumsy against his light-footed opponent and this often leads to his downfall. Of course, that is not to say that all heavy boxers are losers. But heaviness comes at a price.

    The same is the case with mutual funds. A smaller fund (of say less than Rs 500 m) is not necessarily at a disadvantage as compared to its larger peers. Here is why.

    Advantages of small portfolios

    • Nimbler. Just like the lighter boxer in our example. Smaller funds are nimbler. So fund managers find it easier to reshuffle stocks in the portfolio. For a Rs 500 m fund portfolio manager, offloading say Rs 50 m (10% of net assets) is one dayís job. His fund and even the market is unlikely to feel any impact. But if a Rs 5 bn fund portfolio manager tried offloading Rs 500 m (10% of net assets) in one day, the impact on the fund could be dramatic. The fund manager would be forced to offload the stock over a few days so as to deaden the impact on his portfolio.

    • More focus. Smaller funds own fewer stocks. They are able to research their stocks more effectively, and tracking is relatively easier. Fund managers generally have a handful of favourite stocks (about 10-15) and watch these stocks closely.

    • Performance. Larger funds find it that much more difficult to beat the market. They just about manage to match the benchmark indices perform like the market averages, or like an index fund, except that itís saddled with management and transaction costs. This cost disadvantage explains why large funds often trail their smaller peers as well benchmark indices.

    Advantages of large portfolios

    But there are times when size does matter. Despite the factors favoring small funds outlined above, large funds do manager to post better performance than their nimbler peers. Larger funds benefit from the following characteristics:

    • Superior talent: Larger funds are perceived as being more prestigious (and often rightly so) and are in a position to pay high salaries (and perquisites) to attract and retain the best portfolio managers and analysts. Large funds also get a more comprehensive coverage of the market as they employ a larger team of professionals. This allows them to take more informed decisions vis-ŗ-vis smaller peers.

    • Lower expense ratios. As larger funds have more assets under management, they enjoy economies of scale in transactions. Other things being equal, lower costs lead to improved results and higher returns for investors.

    • Trading advantages. Certain investments are typically made in large lots. Money market instruments, government securities (gilts) and bonds are a case in point. Trades in these instruments tend to be very large, and fund managers can negotiate better deals by swapping larger lots.

    However, there are no set rules in the industry as far as the portfolio size is concerned. A small fund could outperform a larger fund by a big margin.

    Fund Name Net
    Assets (m)
    NAV
    (Rs)
    1
    month
    3
    months
    6
    months
    1
    year
    *CAGR
    Since inception
    Discovery Stock
    fund
    380 7.2 8.0% -5.7% -5.7% 25.4% -5.1%
    Alliance Equity
    Fund
    5,694 38.5 14.9% -3.5% -5.0% 13.5% 80.7%
    Kothari Bluechip
    Fund
    2,301 24.4 15.2% 2.9% -0.7% 9.5% 30.0%
    ING Growth
    Fund
    13 16.7 17.3% -17.6% -17.2% -1.1% 39.6%
    Zurich (I) Equity
    Fund
    369 19.7 8.6% -4.3% -8.8% -6.4% 13.5%
    K 30 458 16.5 10.8% -5.6% -10.2% -10.4% 44.3%
    Pru ICICI
    Growth Fund
    4,727 23.0 10.5% -8.3% -7.1% -12.6% 39.5%
    Sun F&C
    Value fund
    358 21.4 16.9% -5.3% -9.8% -12.6% 29.4%
    Birla Advantage
    Fund
    5,489 35.6 6.2% -15.7% -22.4% -22.3% 30.7%
    Multiplier
    plus 1993
    3,482 16.9 13.2% -27.8% -24.7% -37.3% 8.7%

    *Coumpounded Annual Growth Rate
    (Net assets of the funds are as per latest fund fact sheets)

    It is evident from the above table that size of the fund portfolio guarantees nothing. A puny fund like Discovery Stock Fund (at Rs 380 m) leads the table over 12 months with a 25.4% appreciation in the net asset value (NAV). On the other hand, the second largest fund in our sample Ė Birla Advantage Fund (at Rs 5,489 m) is the penultimate fund in our study with -22.4% decline over the same period.

    So size could mean nothing after all. However, investors need to take the size into consideration before investing. As we have highlighted, both type of funds have their advantages. Ultimately the investor must decide what he is looking for, and what kind of a fund size best satisfies his investment objective.

     

     

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