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Hey, everyone. What is the standard? At what amount of assets under management do you figure that a fund is "bloated?" I suppose it depends on what its mandate is, and whether SC, LC, Mid-Cap, balanced, bonds...? I see PIMCO and Dodge and Cox funds with billions and billions AUM. Is BLOAT to be EXPECTED? What would make you get out of a fund due to bloat? Can't help myself. Gotta add this item, regarding BLOAT:
Well it depends. Some strategies have a lower capacity than others. But speaking generally, a billion AUM is a nice round number and anything more than that I think we can start talking about bloat. I've seem some funds soft close from 1 to 2 B. But I don't have hard and fast rules on bloat, personally. I invest in some funds with much higher AUM. I'm not sure if I would invest in them today if I did it all over again (Is that a sign that I should sell and move money elsewhere.). I think it's very difficult to deliver top tier returns with AUM over 10 Billion, but there are exceptions. (DODFX has over $64 billion, 5 stars from M* and nearly an MFO great owl (RG of 5 for 10 year, 3 year, and 1 year, RG of 4 for 5 year).)
"Bloated" is when a very large fund turns south and investors flee. "Efficiency of Scale" is when a very large fund does well and investors send money.
In addition to bloat, look at hot money indicators as that's a big problem for some funds. The following is from Max Funds (lol) and shows how they rate MFLDX in several categories. Notice they rate it very poorly on their "Fat Fund" scale and also on their "Hot Money" scale. Imagine yourself trying to manage a big pile of $$ - especially where you do a lot of buying and selling (see "Turnover Ratio" for MFLDX). All at once the flood gates open and that $$ you're trying to manage starts running out the door. Just makes your job that much harder and probably increases the losses for the remaining shareholders.
There's a number of things fund companies can do to try to mitigate very large inflows and outflows, such as imposing redemption fees. The nature of a particular fund and its management style have a lot to do with this as well. PRWCX, for example, probably scores favorably on the hot money scale (but not the fat-money) because of its conservative "Steady Eddie" approach.
It varies with the strategy. The more stocks you wish to own, the greater your capacity will be. Likewise, the lower down on the capitalization scale you wish to go, the lower your capacity will be. For example, let's say a fund wants to own 40 stocks and it's will to go down to $1 billion in market cap. Assuming you don't want to own more than 5% of any stock you get:
$1 billion x .05 = $50 million x 40 (the no. of stocks held) = $2 billion.
So roughly measured, you get a $2 billion capacity for that sort of strategy (GAINX might be a good example). That would be my rule of thumb, anyway.
To me, bloat is when the AUM forces a fund to buy outside of its agenda. A small cap fund that becomes bloated ends up purchasing shares of mid caps. That would be one sign. Another would be that the fund owns so many shares in multiple venues that a sale would affect the markets. That doesn't happen too often but I may be wrong there. PTTRX comes to mind as a bloated bond fund that if forced to sell certain items could concern the markets.
Thanks, all. Really. OK, so you guys don't say to yourselves: "When this fund reaches $5B I'm gone. It's a very relative term, considering a fund's mandate. Over the years, I've deliberately put $$$ into young funds which ipso facto do not have a big asset base, yet. Funds like SFGIX Seafarer, MSCFX Mairs & Power Small-cap, TRAMX TRP Africa/Middle East, MAESX Matthews Frontier Asia, DLFNX DoubleLine core-plus, MAINX Matthews Asia bonds...... Of the not wonderful choices available in my wife's 403b, I selected Vanguard Small-cap Index NAESX. Still less that a thousand dollars in there. THERE is a fund that M* has even featured re: asset drift, connected to bloat. M* says it owns way too much now in Midcaps to truly be a small-cap fund....
Hi Crash: Generally I don't. But a lot of smart money (smarter than me) does. As others have said, it depends some on the type of fund. I look at the .53% ER on DODBX and their long term track record, the fact that it's a privately held company, their core of long-term investors, their buy and hold philosophy, etc., and I say: "I can tolerate the bloat". However, I'm sure there's a penalty being paid for the bloat and so that's just my own humble perspective..... Now - If it was a bloated fund charging outrageous fees or experiencing unusually big money flows in/out, it would be a different story.
Looking at your list above, Crash, these funds appear much more focused (by sector or geo-political region) than my example above and yes, I'd worry about bloat. However, I'd worry even more about the hot money issue. Narrowly focused funds make prime targets for market timers and momentum players.
I'm not sure I would sell a fund if its AUM grow beyond what I think is reasonable, but I would certainly not buy a fund that I think has too many AUM, and I adjust how I analyze a fund's performance when the assets grow higher than I'm comfortable with. A good example is PRNHX, which is supposed to be a small cap fund but is actually a mid cap fund and has more assets than I'd like to see even in a mid cap fund. Yet when I compare its results to both small and mid cap alternatives I'm still very happy so I've kept the fund. I also wouldn't give it as much leeway to underperform as I would a fund that has lower AUM assuming all other aspects being equal.
"Looking at your list above, Crash, these funds appear much more focused (by sector or geo-political region) than my example above and yes, I'd worry about bloat. However, I'd worry even more about the hot money issue. Narrowly focused funds make prime targets for market timers and momentum players."
Correct. My more generic, tame, broad-based domestic balanced funds are PRWCX TRP Cap Apprec and MAPOX M&P.
if Max and Crash is the same person, which i suspect it is, would you kindly pick one handle and stick to it as not to confuse others? if not, i apologize in advance.
Pretty elementary observation here ... But, has anyone explained that bloat is an issue at the most basic level because it hamstrings the manager when buying or selling shares? A small fund can open a new position or add to an existing one without other market participants taking much notice. For a large fund, however, the moment they begin to buy or sell a position they rock the markets. That's because the quantities they need to purchase or sell in order to make an appreciable difference in their allocation to the security are so much larger. If they're buying, the price of the security they are buying begins to rise so they end up paying more for it than originally intended or having to abort the process. When selling a position it works in reverse. Begin dumping huge quantities of a stock on the market and the price starts to tumble. So yes ... Absolutely ... All else being equal, smaller funds have an advantage. (Of course all things are rarely equal.)
@hank, That was a better explanation of what I was trying to get across. Thanks. The other alternative would be to accumulate cash which would affect fund performance and also might violate the mandate of the prospectus if it says they are to be fully invested.
For a large fund, however, the moment they begin to buy or sell a position they rock the markets. That's because the quantities they need to purchase or sell in order to make an appreciable difference in their allocation to the security are so much larger. ... All else being equal, smaller funds have an advantage. (Of course all things are rarely equal.)
To the extent that large fund complexes "buy the market", all else may not be equal. In a large complex, the various funds may trade among themselves, avoiding market movement. The term is "cross trading".
I'm not suggesting that bloated funds can be better because of this, just that it can mitigate the effect you're describing. It can also suffer from various conflicts of interest (which curiously may also assist the bloated fund).
Thanks msf: Makes sense and I'd suspect T.Rowe does exactly this when I buy or sell one of their many different funds. Would really help with trading costs too.
At D&C far less likely. With just 6 funds and a great deal of over-lap in holdings.
Generally, I take AUM in consideration when buying a fund, but then when deciding to sell, it's more about performance.
I don't decide to sell a fund based on AUM alone. (Although in the case of MFLDX, one could argue that it would of been a good strategy. Time will tell.)
Find out who has the final say in whether a fund remains open or closes. If the answer is NOT the management team, be very careful. This information is almost never available in any fund document. It must be obtained by speaking with someone from the fund, preferably management itself.
Then there is the rare manager who, even without the final say, will just say no.
Hakan Castegren managed Ivy International IVINX. In 2000, the fund company wanted to reopen the fund - Castegren said no, so technically he was fired. The good news was that he was also managing the noload version, Harbor International (HAINX), which could reopen because he was no longer laden with a clone.
That raises another gotcha with bloat. Watch out for clone funds. Near carbon copies, but they don't share the same portfolio (though their separate portfolios may contain identical holdgings). So the AUM figures you see for clones are not added together. But to the extent they trade in sync, the market impact is a combined effect.
The manager may also be stretched - one can follow just so many securities.
Comments
"Bloated" is when a very large fund turns south and investors flee.
"Efficiency of Scale" is when a very large fund does well and investors send money.
In addition to bloat, look at hot money indicators as that's a big problem for some funds. The following is from Max Funds (lol) and shows how they rate MFLDX in several categories. Notice they rate it very poorly on their "Fat Fund" scale and also on their "Hot Money" scale. Imagine yourself trying to manage a big pile of $$ - especially where you do a lot of buying and selling (see "Turnover Ratio" for MFLDX). All at once the flood gates open and that $$ you're trying to manage starts running out the door. Just makes your job that much harder and probably increases the losses for the remaining shareholders.
There's a number of things fund companies can do to try to mitigate very large inflows and outflows, such as imposing redemption fees. The nature of a particular fund and its management style have a lot to do with this as well. PRWCX, for example, probably scores favorably on the hot money scale (but not the fat-money) because of its conservative "Steady Eddie" approach.
http://www.maxfunds.com/funds/data.php?ticker=MFLDX&pg=d
$1 billion x .05 = $50 million x 40 (the no. of stocks held) = $2 billion.
So roughly measured, you get a $2 billion capacity for that sort of strategy (GAINX might be a good example). That would be my rule of thumb, anyway.
Looking at your list above, Crash, these funds appear much more focused (by sector or geo-political region) than my example above and yes, I'd worry about bloat. However, I'd worry even more about the hot money issue. Narrowly focused funds make prime targets for market timers and momentum players.
Correct. My more generic, tame, broad-based domestic balanced funds are PRWCX TRP Cap Apprec and MAPOX M&P.
Regards,
Ted
In all seriousness, I agree with a lot of what JohnChisum said.
I'm not suggesting that bloated funds can be better because of this, just that it can mitigate the effect you're describing. It can also suffer from various conflicts of interest (which curiously may also assist the bloated fund).
At D&C far less likely. With just 6 funds and a great deal of over-lap in holdings.
I don't decide to sell a fund based on AUM alone. (Although in the case of MFLDX, one could argue that it would of been a good strategy. Time will tell.)
Hakan Castegren managed Ivy International IVINX. In 2000, the fund company wanted to reopen the fund - Castegren said no, so technically he was fired. The good news was that he was also managing the noload version, Harbor International (HAINX), which could reopen because he was no longer laden with a clone.
That raises another gotcha with bloat. Watch out for clone funds. Near carbon copies, but they don't share the same portfolio (though their separate portfolios may contain identical holdgings). So the AUM figures you see for clones are not added together. But to the extent they trade in sync, the market impact is a combined effect.
The manager may also be stretched - one can follow just so many securities.