Bit off more than you can chew? It’s like eating a slice of chocolate cake and then trying to run a marathon... in the world of investing, large cap companies and even larger funds, while tempting, may not get you to your financial finish line as fast as you might like. Perhaps it’s time to consider downsizing the assets you have under management.
Great things can come from small funds
As David Swensen, CIO of the Yale Endowment Fund told Mercer: “Size is the enemy of (fund manager) performance. If you limit assets under management, you have a much better chance of beating the market.”
According to a recent article from The Telegraph, Warren Buffett himself has said that the growth of his company, Berkshire Hathaway, has made it increasingly difficult to create large returns for his clients.
Managers of larger funds might aim to get you on board with a portfolio teeming with sizable assets (more clients mean more profits), but bigger isn’t always better. The Telegraph points out that a large fund has little incentive to invest in smaller companies, since the returns won’t significantly feed the bottom line. However, there’s nothing stopping small funds from buying the best opportunities from companies both big and small.
Have your cake and eat it too?
Vivian Lo of Aston Hill Asset Management knows this well. Her $300 million Growth & Income Fund and $70 million Global Growth & Income Fund might look meagre compared with competitor funds reaching upwards of $5.8 billion - and yet, it was rated the best performer of its class last year by The Globe and Mail.
“One common misconception is that smaller means riskier, but that’s not always the case,” says Ms. Lo. “A smaller fund size just means you have more investing opportunities because you can look at smaller cap companies.”
Ms. Lo goes on to explain the benefits of managing a smaller fund: “With a small, nimble fund like mine, I don’t need to worry about liquidity constraints - in other words, how easily a security can be traded without impacting its price. Because of this I have a much broader universe of securities to choose from to then analyze and make my investment decisions. Also, there are lots of smaller, good quality companies that could make a great investment, and because of my fund’s small size, I can buy shares in one of these smaller, but not riskier, companies and have it make a meaningful impact on my fund’s performance.”
Indeed, it often is the smaller servings that can leave us (and our pockets) feeling fuller.