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What Ails Fairholme?

Part of the success can be attributed to its relatively low expense ratio. Because of its bulk, the fund enjoys economies of scale and can afford to charge annual expenses of 0.69%, compared to 1.34% for the average large growth fund. In addition, Growth Fund of America avoids some of the problems of bloat by using an unusual management structure. The fund employs nine managers, and each is given a separate piece of the assets to oversee. In effect, every manager oversees a portfolio of about $10 billion to $15 billion, a manageable size. This is very different from typical funds, which lump all assets in a pool that is overseen by one manager or a small team.

The biggest fund of all is PIMCO Total Return, an intermediate-term bond fund with $242 billion in assets. Portfolio manager Bill Gross long argued that his fund was not too big because it focused on sectors such as government bonds and mortgage-backed securities, enormous markets that enable easy trading. Gross has argued that his size provides an advantage because he can negotiate favorable terms with brokers.

PIMCO typically makes a series of small bets, emphasizing Treasuries one year and foreign bonds the next. Most of the calls have paid off. During the past ten years, the fund has returned 6.7% annually, outdoing 93% of peers. Earlier this year, Gross became concerned that interest rates would rise, a development that could hurt bond prices. To avoid trouble he held cash and shifted to shorter bonds, which suffer less damage when rates climb. The move proved off target. It was an example of Gross making a rare mistake. The poor results should not be attributed to a bloated portfolio.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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