Mutual Funds Made for This Decade

NEW YORK (TheStreet) -- For most mutual funds, the past decade has been miserable. The S&P 500 lost 0.7% of its value, on average, every year, and large-blend funds barely eked out a gain, returning 0.3%.

But some funds managed to deliver decent results. Buying stocks that many investors hated, Oakmark Select(OAKLX) increased 7.2% annually, outdoing all its large-blend competitors, those that invest in growth and value shares. Yacktman Fund(YACKX), another contrarian, rose 12.3% annually. Among foreign funds, Longleaf Partners International finished near the front of the pack, advancing 7.5%.

Will those funds maintain their winning records during the next decade? Perhaps. But investors should take note that many of the leading funds have more than $1 billion in assets, and their strong records are likely to attract more cash. That will make it more difficult for veteran managers to repeat their success. Many academic studies have shown that large funds tend to lag behind small ones.

Huge funds face a handicap because it's cumbersome for them to trade. To appreciate the problem, consider Fidelity Contrafund(FCNTX), which has $61 billion in assets. About 2% of the portfolio, or $1.2 billion, is in shares of Visa(V), the credit-card company. That's more than double the amount of the stock that trades every day. Say the shares start slipping, and Contrafund wants to exit. It could take days or weeks to complete the sale, and all the while the stock could be dropping. In contrast, a fund with $100 million in assets could sell a 2% position in an hour.