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Size is Worth Considering
We like things big. Cars, houses, lifestyles. Inflated sizes can be have drawbacks when it comes to mutual funds. Size does matter, but it isn't necessarily for the good of the fund. Billions of dollars have been put into stock funds recently (over $34 billion in April alone) causing some funds to swell in size to the point of becoming hard to handle. For these funds, the only option to better performance is to close the door to new investors.
Equity funds should thrive on their ability to spot movements in the market and react accordingly within the investment style that was outlined in their charter. This investment style can be compromised by the amount of stocks that a fund can purchase. The assumption is this: If a fund has a billion dollars in cash, the available stocks to purchase is limited to around 2600 companies, based on owning no more than a 10% stake in any one company, and investing no more that 2% of that billion dollars in any one investment. If that fund had $20 billion to invest, the list of available companies that would fit the previous criteria shortens to just under 350. By narrowing the field of possible stocks that it can buy leaves the fund open to a volatile market that they can not react to quickly.
Large funds can actually hurt their own stocks price if they try to sell a position in a company and the amount of shares they wish to sell is greater than the daily volume that was being traded. Simply, if they wanted to sell, everyone would want to know why creating an artificial panic in the stock, driving the volume (amount of trades of a stock during a particular day) higher on the rumor that maybe the fund knows something no one else does. To keep this from happening, the selling of a particular issue might take more time than is beneficial to the investor. In other words, because the sale can have an effect on the price, large holdings have to be sold over a period of weeks or worst, months, so as not to hurt the selling price.
Does this mean bad things for large funds that manage enormous assets? No, but the risk of becoming a benchmark itself is not good, because beating that mark and performing better becomes more difficult with size. Most recent example of the above mentioned trouble came when Nokia preannounced earning difficulties and the large position of that stock at several Janus funds, including two that are on the BCD31. The stock took a sudden hit as the market reacted to the news, and even though the Janus Twenty fund was closed to new investors, the reaction time, if they had chosen to sell, would not have as been as long had the fund closed at $1 billion in assets. In this particular instance, size hurt performance. Although over the long run, we still hold Janus and several other behemoth size funds on the list, watching their performance for signs of performance slow down because of their size will be a consideration during our next evaluation period.
Debt
Is there such a thing as good debt? What do you suppose bad debt is? And what kind do you have?
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