Does it matter if your fund is too small or too
big? We think it does. Neither too big nor too small is good for a fund's health.
In the mutual funds industry, past success is often a sign of future trouble. It's
paradoxical, but that's how it is. When a fund ranks high among its peers, it attracts
more money from investors. When a fund manager is flushed with new cash, his/her main
problem becomes that of finding suitable investments to employ the cash. The larger the
fund, the more serious the problem. This can be particularly tricky for categories where
fund managers do not have a lot of choice to start with, such as large cap equities
(including equity oriented dividend funds), small cap funds, high yield bond funds, etc..
When that happens, fund managers start doing things that they should otherwise avoid. For
example, Canadian equity funds start engaging into closet indexing. Small cap funds start to
invest in large cap equities. When managers really run out of options, they may sit on a pile of cash.
None of the above can be tempting for investors. If your fund is a closet indexer, you might as well invest in an
index fund. It's cheaper. If your small cap fund invests in large caps, you might as well
move part of your portfolio to large cap funds and save on the management fees. If your
fund is sitting on a pile of cash, you might as well put part of your money in Treasury
Bills.
You wouldn't want a small size fund either. Small funds do not make money for their sponsors. Unless they can grow and become profitable, they could eventually be axed. When small funds are discontinued, investors' money can be transferred to other funds within the company, and that may not always suit your objectives.
How small is too small and how big is too big? Those are the rules of thumb: For small funds, if total assets are less
than $50 million, you should watch both the fund's size and results very closely. Poor results lead to a smaller size and, eventually, oblivion. For too large funds, anyone with total assets over $ 1 billion should be suspected, and examined, for signs of either closet indexing, high cash balances or deviation from main objectives.