"Big funds might boost a fund company's profits, but they're often not great investments."
That's etched in stone in the place where they keep the fund world's rules of thumb, but, like any blanket statement, it's not always true.
For years fund experts have told us that big funds are like beefy bulls blundering around Wall Street's china shop. The idea is that as a fund gets a lot bigger than its peers, it can lose the ability to move quickly out of sinking positions or build big positions without raising a stock's price in the process. This is particularly true of funds that invest strictly in thinly traded small-caps or stocks within one industry sector, according to conventional wisdom.
Back in August we
tested this theory among small-cap funds and found that there were quite a few with assets above $1.5 billion -- the widely assumed asset ceiling for nimbleness -- that had performed well. This week we're testing the same theory among sector funds.
The upshot: The adage about size and sector funds isn't necessarily true, either. While some big sector funds trail their nimbler peers, some of these battleships can still maneuver pretty well.
Unlike small-caps, there isn't a popular idea of exactly when a sector fund is getting too big. We screened each sector fund category for funds with above-average assets. In all but one category -- utilities -- at least half of these big funds beat the peer average over the previous three years, according to
There's the short answer. Now let's get down to where the rubber meets the road. Here's a look at the three biggest funds in each sector fund category and their performance vs. their peers. There are some big-name funds here and some are carrying all that weight quite nicely, though that's not necessarily the case with last year's winning sector (tech) or this year's leader (health care).
There are more than 40 billion simoleons invested in these three funds. As you can see, each of the three has posted solid absolute returns for three years. But those big numbers lag behind their average peer's.
And since Jan. 1, the $16.1 billion heavyweight champ,
T. Rowe Price Science & Technology, is trailing the techy pack. But the $12.5 billion, broker-sold
Alliance Technology fund and the $12.1 billion
Fidelity Select Electronics fund are ahead of the game.
When it comes to health care funds, smaller-cap biotech stocks have been a big driver this year, and there's only so much pop a big fund can get from small fry stocks. Even though the Fidelity fund on this list has "biotechnology" in the name, it has a lot of money in bigger-cap fare. That's probably one reason why the category average has trounced these three funds since Jan. 1.
Over the last three years, however, the $14.3 billion
Vanguard Healthcare fund has trounced its peers, as did the $5 billion
Fidelity Select Biotechnology fund. Broker-sold, $7.5 billion
Putnam Health Sciences, which typically follows a barbell strategy -- buying the biggest of the big as well as the minnows-- trails over both time periods.
Over the last three years the telecom category's heavyweights, the $3.5 billion
Invesco Telecommunications, $2.9 billion
Fidelity Select Developing Communications and $2.5 billion
Flag Investors Communications funds all beat their peers. But since Jan. 1, Flag Investors has trailed the average telecom fund, which is down a whopping 16.5% this year after gaining more than 70% last year.
These three funds have nearly $9 billion in their combined coffers. If you'd like to know where Invesco Telecommunications Manager Brian Hayward is putting money in the sagging sector, check out this
10 Questions interview.
These financial funds show both the upside and the downside of slicing one sector fairly thin. The broker-sold $3 billion
John Hancock Regional Bank fund, run by Jim Schmidt, has been lagging behind its peers this year and over the last three years because banks have been dusted by other sleeves of the financial sector, like insurance companies, asset managers and brokerages. The $1.8 billion
Fidelity Select Insurance fund's focus has paid off in recent years.
Like most financial sector funds, the $2.9 billion broker-sold
John Hancock Financial Industriesfund, also run by Schmidt, has focused on hotter parts of the financial sector to stay ahead of the pack. For Schmidt's take on the sector and where it might be going, check out this
10 Questions interview.
It would be a clean sweep for the biggies in the utilities fund category if it weren't for the $3 billion
Fidelity Utilities fund's hefty telecom-stock stake. At the end of July the fund had some 65% of its assets in telecommunications stocks. As you can tell from this year's weak showing by telecom sector funds, this hasn't helped.
The $4.7 billion
Prudential Utility fund and the $2.7 billion
MSDW Utilities fund, both broker-sold, have put more emphasis on traditional utilities. That's helped them beat their peers this year and over the last three years, even though they're among the biggest kids in their class.
In the natural resources or energy fund group -- these funds primarily invest in oil and natural gas company stocks -- all three of the biggest funds beat their peers over the last three years.
This year, rising commodities prices have boosted the whole category. While the $1.1 billion
Vanguard Energy fund and the $880 million
Fidelity Select Energy Services fund have ridden that wave and stayed ahead of their peers, Charles Ober's somewhat conservative strategy has limited the $1.1 billion
T. Rowe Price New Era fund to a 9.2% return that beats the
S&P 500 easily, but not the fund's peers.
To read about energy-stock investing, check out this
10 Questions interview with
Vanguard Energy fund Manager Ernst von Metzsch.
In the real estate fund pool, two of the three biggest funds have beaten their peers since Jan. 1 or over the last three years. The only big real estate fund to do both is the no-load, $1.1 billion
Vanguard REIT Index.
In many ways these results exemplify what we've found overall: Some big sector funds keep pace and some don't. But you can't say extra cash will always hold a sector fund back.