FUND SIZE MAY MATTER

September 16, 2008
Michael Sheehan

Physician's Money Digest, January15 2003, Volume 10, Issue 1

The more money a mutual fundhas in its coffers, the more moneythe fund company makes—a clearincentive to allow funds to get bigger.But according to research fromPlexus Group, size can be a problemwhen it starts raising a fund's tradingcosts to the point where they eat intoexpected returns. Stock trades bylarge funds tend to be more expensive,partially because of so-called"market impact," where a big sellorder can affect the price of a stockand lower the value of a fund'sremaining holdings in the stock. Onesolution is to close funds when theyget too big, but most fund firms areunwilling to take that step. Anotherfix investors aren't likely to see istying fund manager compensation toperformance rather than to assetsunder management.