NEW YORK ( TheStreet) -- Fairholme (FAIRX) ranks as one of the fastest-growing mutual funds of all time. Assets in the portfolio increased from $49 million in 2002 to $18.8 billion in 2010. What drew investors were eye-popping returns. Beginning in 2004, the fund finished in the top quarter of its category for seven consecutive years. But the streak has ended abruptly. This year, the fund has lost 25.3%, trailing 99% of its peers, according to Morningstar.
Some shareholders fear that the fund has simply gotten too big. All too often, big funds become unwieldy to manage, and their returns suffer. Academic researchers have long known that small funds tend to outdo large ones.
The issue of size is a particular concern in today's volatile markets because Fairholme is not the only large fund that is disappointing shareholders. Other giants that have finished in the bottom half this year include American Funds Growth Fund of America (AGTHX), Davis New York Venture ( NYVTX ), Dodge & Cox Stock ( DODGX ) and PIMCO Total Return ( PTTDX ). Shareholders have been dumping the giants, and some financial advisors have begun to believe that the former champions have simply gotten too big.
But Fairholme's portfolio manager Bruce Berkowitz says that his problem is not size. Berkowitz has a point. While size presents a handicap for most funds, Fairholme and some of the other struggling giants are exceptions to the rule. Because of their unusual approaches, these big funds should be able to deliver competitive returns over the long term.There is no clear guideline about when funds become too big. But as a rough rule of thumb, Morningstar says that portfolios of large-cap stocks may become unwieldy when assets top $18 billion. Above that line, some funds close to new investors in an effort to avoid bloat. To appreciate the hazards of bloat, consider Fidelity Magellan ( FMAGX ). When Peter Lynch took over the fund in 1977, it was a racy portfolio with $22 million in assets. During the 1980s, Magellan set performance records. But after it topped $60 billion in assets in 1997, the fund became a mediocre performer. During the past 15 years, Magellan has lagged 77% of its peers.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV