Back in the 90's, I remember discussion abut mutual fund size becoming too big. This may cause the fund to be closed. For example, I believe funds like Trowe Price Capital Appreciation were closed because it got too large. However these are all actively managed funds. The issue with fund size is finding investment. If the fund is an index fund, you are just buying the asset according to the index. Does this mean that for an index fund, a bigger fund has a greater economics of scale and has reduce expenses?
Flipping the script, are there funds that are too small to invest in? I am curious to see how often funds get closed?
Is larger size better for index funds?
Re: Is larger size better for index funds?
The problem with active funds is that the manager needs to find above-average investments for new money. If the manager purchases a large volume of a particular investment it drives up the price of the investment, such that it is no longer a "good buy". Peter Lynch writes about this problem with Magellan in his book.
Not a problem for passive funds, they just purchase "everything". And yes, economies of scale for large passive funds.
Something around $100 million is probably a quick-check for fund survivability, something less at least has the possibility of closure.
Not a problem for passive funds, they just purchase "everything". And yes, economies of scale for large passive funds.
Something around $100 million is probably a quick-check for fund survivability, something less at least has the possibility of closure.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
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nisiprius
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Re: Is larger size better for index funds?
The "fund size" problem applies only to actively managed funds. It is related to the rules a fund must follow to be considered "diversified." Specifically, a "diversified" fund may not hold more than 10% of the outstanding shares of any single stock.
For example, I don't know the actual numbers but one of Peter Lynch's good stock picks was Hanes, maker of L'eggs hosiery. Hanes was at one point one of the Magellan Fund's biggest positions. Currently the Magellan Fund manages $36 billion, Hanes has a market cap of $3 billion, 10% of that is $0.3 billion... therefore, to be considered diversified, the Magellan Fund cannot hold have more than 0.3/30 = 1% of its portfolio in Hanes.
In other words, the requirements for diversification inhibit large funds from making significant investments in the kinds of smaller companies in which active managers can (supposedly) shine: good smaller companies that haven't been fully analyzed by everyone else. Large funds just can't be as active as smaller funds.
There are economies of scale for large index funds, but you usually evaluate that, not by looking at fund size, but at the expense ratio.
For example, I don't know the actual numbers but one of Peter Lynch's good stock picks was Hanes, maker of L'eggs hosiery. Hanes was at one point one of the Magellan Fund's biggest positions. Currently the Magellan Fund manages $36 billion, Hanes has a market cap of $3 billion, 10% of that is $0.3 billion... therefore, to be considered diversified, the Magellan Fund cannot hold have more than 0.3/30 = 1% of its portfolio in Hanes.
In other words, the requirements for diversification inhibit large funds from making significant investments in the kinds of smaller companies in which active managers can (supposedly) shine: good smaller companies that haven't been fully analyzed by everyone else. Large funds just can't be as active as smaller funds.
There are economies of scale for large index funds, but you usually evaluate that, not by looking at fund size, but at the expense ratio.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.