With the concept of branding so important in today's world, it's understandable why many investors wind up putting their money in the largest of mutual funds.
Big funds not only have name recognition but also are easy to track and often are assigned a fund family's finest manager. They get first crack at initial public offerings and, when they make trades, enjoy priority treatment and lower fees.
Their economies of scale usually translate into lower expenses for investors as well. Most recently, Fidelity Investments and Vanguard Group have been battling it out to offer the lowest-cost stock index funds in order to snare the lucrative assets of large investors.
Megafunds have financial clout to influence both public opinion and the management of the companies whose stocks and bonds they hold.
William Gross, whose duties include running Pimco Total Return Fund (PTTAX), recently posted this on the Pimco Web site about Ben Bernanke, the nominee to be new chairman of the Federal Reserve: "I view him favorably, especially his views of inflation targeting, which if accepted as policy, should help intermediate and long-term bond yields to stay low."
Why should we care? Well, in that fund, Gross handles $89 billion of those intermediate bonds he's talking about.
Yet for all their power and visibility, the biggest funds are of such lumbering size that they're best suited to the more easily managed large-cap stocks or bonds, not sectors or small-cap stocks. They offer steady, but not blistering, performance and function more like index funds than actively managed funds. That's because they hold many big-name holdings for so long.
Never toss money into any fund because you did in the past, because it's the thing to do or because its advertising is everywhere. Too often, investors stash retirement money in the biggest funds and forget about it until they retire.
"Our studies show asset size generally does not affect a fund's performance for better or worse in large-cap, mid-cap and multicap funds," said Andrew Clark, senior analyst with Lipper Inc. in Denver. "The only place it seems to make a difference is small-cap funds, whose performance deteriorates if they have more than $2 billion under management."
Don't take it for granted that every large fund has a terrific manager.
"At Fidelity, longtime portfolio manager Will Danoff of Contrafund is a great stock-picker who has done well as his fund has grown larger," while Magellan manager Robert Stansky "hasn't done all that well" yet stayed on for many years before announcing his retirement Monday, said Jack Bowers, editor of the independent Fidelity Monitor newsletter (www.fidelitymonitor.com) in Rocklin, Calif.
As a fund grows, it can become difficult for a manager to remain inventive.
"While they may claim they're not 'closet' index funds, when you're that big you're going to have a lot of major companies such as Microsoft and General Electric in your portfolio," said Sheldon Jacobs, editor of the No-Load Fund Investor newsletter (www.sheldonjacobs.com), in Brentwood, Tenn. "The real problem arises with small-cap funds, because to grow significantly, their manager must either add hundreds and hundreds of companies or drift into mid-caps."
Some fund families, especially the American Funds, allow assets to grow unabated, while others such as Dodge & Cox Stock Fund and Fidelity Magellan are closed to new investors. There can be conflict within fund companies over whether to close.
"More assets mean more management fees, even though a portfolio manager may be screaming that he can't handle all the incoming assets in accordance with the fund's investment style," said John Markese, president of the Chicago-based American Association of Individual Investors. "Some funds may never have to close to new investors because they're invested in large-cap stocks, while it would be very difficult to manage a really enormous sector fund."
The largest funds are not exactly alike, current performance doesn't always live up to reputation and each must be monitored as you would any small "no-name" fund.
Here are returns and strategies of popular jumbo funds of several fund families, some managed by committee, from Lipper:
American Funds Growth "A" (AGTHX), $117 billion in assets; up nearly 6 percent this year; three-year annualized return 16 percent; five-year 0.62 percent; 10-year 13 percent. A growth fund so big it is run by eight high-quality portfolio managers, each independently running a portion of assets. Though diversified, it is still somewhat riskier than a basic S&P 500 fund.
Vanguard 500 Index (VFINX), $106.4 billion; down 1.41 percent this year; three-year annualized return 12 percent; five-year down 1.29 percent; 10-year 9 percent. The famous low-cost index fund buys and holds stocks of the S&P 500 and therefore should be expected to lag in small-stock rallies.
Fidelity Contrafund (FCNTX), $55.7 billion; up 9 percent this year; three-year annualized return 16 percent; five-year 4 percent; 10-year 12 percent. Star stock-picker Danoff has a long record of excellence. The fund no longer sticks strictly with mid- and small-cap stocks, and has reduced its portfolio turnover.
Dodge & Cox Stock Fund (DODGX), $46.3 billion; up 3 percent this year; three-year annualized return 19 percent; five-year 12 percent; 10-year 15 percent. This widely held, low-expense fund currently closed to new investors is run by a nine-member policy committee that seeks mid- and large-cap stocks at value prices.
Andrew Leckey answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," P.M.B. 184, 369-B Third St., San Rafael, Calif. 94901-3581, or by e-mail at andrewinv@aol.com.