The Anna Maria Island Sun Newspaper

Vol. 12 No. 29 - May 2, 2012


Anna Maria Island Sun News Story

David versus Goliath

Investment Corner

One of the conundrums for companies which manage mutual funds and the investors who invest in these funds is the issue of size. In the fund management business, size is all about the total dollar amount being managed by the manager or management team.

If there was ever an example of success leading to mediocrity, perhaps the mutual fund business is it, although some select managers have risen above the pack. Smaller funds with a smaller amount under management can be more nimble. They are able to move into and out of stocks, bonds or other vehicles without their trades impacting the market price as much as a very large fund. Larger funds generally have to start to hold more securities in the portfolio to help avoid this liquidity problem, which could translate into money being put into portfolio holding, which are not the managers favorite, but which they hope will do OK.

It's easy to see how successful smaller funds with great track records start to attract more investment dollars from investors desiring to participate in the gains they hope will continue. The fund management companies desire more investment dollars to manage because they earn their fees as a percentage of the assets under management (AUM).

But at some point their desire to earn fees can allow a fund to, perhaps, become too large and end up not being able to provide the out-performance shareholders came to expect from the fund. When performance suffers, shareholders may choose to take their money and move elsewhere, creating what is known as an outflow of funds.

So, if you buy a hot fund or a hot manager based on recent success, you should keep in mind that many other investors are likely to be doing the same thing, causing the funds AUM to increase and challenging the manager to keep up the great performance. If you buy a fund which falls into this category, I suggest monitoring the performance of the fund closely to make sure the performance and risk characteristics stay within parameters that are acceptable to you.

When funds grow to be very large relative to the size of the category of investments within which they invest, expecting them to outperform is probably unrealistic. Again, the need to diversify more due to very large levels of AUM forces the fund manager to buy more of the market and their performance and risk characteristics will start to look more like the market.

The funds I admire most are those which don't hesitate to close to new investors when the AUM grows to a level the management team believes will inhibit its ability to deliver good returns and appropriate risk control. You might wonder why I would bring your attention to funds which are closed or have closed in the past. Most funds which close do so after the segment of the market in which they invest has had good success. Of course, what comes around, goes around, and eventually, when their market segment has experienced a correction in price and the managers are finding plenty of bargains to buy, they will re-open their fund to new investors.

Keep in mind when a fund closes to new investors, the current investors have the right to put in more money. Buying a good fund when it re-opens from a closure will give you the right to continue to add to your position in the future.

Good luck and good investing


Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit


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