. Sometimes things just get too big for their own good.
The same can be said of mutual funds, where bigger is not always necessarily better. A fund that is too big in terms of its assets can be held down by its own weight, with too much money flowing in and out of stocks working against its success.
There's no hard-and-fast rule in determining how big is too big for a fund. But analysts say investors should look at a fund's investment strategy, emphasis and management to determine if the fund has grown too large.
If a big fund is buying heavily, that will push up the price of the stock it's buying. On the flip side, heavy selling will send the stock lower. Size is especially relevant for small-cap funds, which sometimes get so big that it becomes difficult to find enough small companies to invest in.
"It's very hard to pinpoint anything precise, but clearly the smaller the stock and the higher the turnover, the smaller the fund should be," says Russ Kinnel, director of fund analysis at
. "A small-cap momentum fund really starts to lose its edge after about $1 billion. A large-cap value fund with low turnover probably isn't going to have problems before $10 billion and probably could go beyond that."
Kinnel says a fund's turnover, or its rate of trading stocks, greatly affects how large it should be. In general, the higher the turnover, the smaller the fund should be so it can effectively move in and out of stocks. The amount of research a company has at its disposal is also important in determining how big its funds should grow, says Kinnel. The more research the fund has, the better-prepared it is to expand. How can an investor find this out?
"If it's a super-high-turnover mid-cap fund, it can maybe be around $2 billion to $3 billion. If there's modest turnover, it certainly might be able to go a good deal higher, say $6 billion or $7 billion," says Kinnel. At the end of August, Morningstar defined a small-cap stock as one worth $1.7 billion or less and a large-cap stock as one worth $10.9 billion or more.
spokesman Brian Mattes says the firm's decision to close funds to new investors depends on the style and approach of the individual funds. The
Vanguard 500 Index
fund, which tracks the performance of the
S&P 500, is the industry's largest mutual fund at $110.5 billion. Because the fund tracks an index and has little turnover, Mattes says the fund could, in theory, grow infinitely.
The fund company has dealt with growth in the past by closing funds, including its $15 billion
and the $4.3 billion
funds, but in recent years has turned to adding portfolio managers to deal with steadily growing funds.
"It's far more cost-friendly to try to keep the fund open in some manner," says Mattes.
For its part,
T. Rowe Price
has kept most of its fund closings to the smaller-cap arena, shutting its $6.8 billion
fund three times during its history and closing its $1.2 billion
Small Cap-Value Fund
in 1996, only to reopen it in 1998.
Unlike Vanguard, which doesn't warn investors of a fund's closing, T. Rowe Price will inform prospective investors if a fund they're showing interest in is going to shut down within three weeks. That way, investors still have a chance to get in, but there's not the rush of new money that often ensues after a company announces a fund's closing long in advance.
"We're not telling the world, but anyone who's considering investing will know," says T. Rowe Price spokesman Steven Norwitz.
Though the pitfalls of having too large a fund are many, there are those who say big isn't necessarily bad.
"It's almost taken on the force of an urban legend that big funds are by their very nature not nimble, and as a result, they can't outperform their relevant indices. But academic studies done on this have not been conclusive," says Ed Rosenbaum, director of research at
Rosenbaum says that contrary to popular belief, he believes large funds can move in and out of positions efficiently because they normally get superior service from brokers -- their sheer size makes them important to the brokerage. He adds that extremely large funds are less likely to change a position on breaking news, making speed less of an issue for them.
"A good portfolio manager should be looking six months, one year down the line, not what's going at this instant," says Rosenbaum.