Many investors believe that bigger is better when it comes to investing, but when comparing what investors are paying for, are larger funds worth the risk?
Increasing attention is being focused on the performance issues and capacity constraints of larger mutual fund and asset management companies in North America. Despite being able to attract the bulk of investor assets, the largest firms are facing lagging performance returns and more volatility than their peers. A great article this week addresses the size versus performance phenomenon, concluding bigger funds and managers are not necessarily the best option for investors who want high quality: http://awealthofcommonsense.com/size-enemy-performance/. The article confirms previous academic research that mid-size managers tend to produce the best results, while those managing over $1billion tend to underperform the market: http://www.businessinsider.com/theres-a-goldilocks-hedge-fund-size-2014-3.
This issue is especially relevant in Canada, where only a very small number of stocks are truly liquid enough to be actively traded by multi-billion dollar funds. Investors should question what value can be produced when so much money chases such a small selection universe, and whether the fees charged justify what is essentially a closet index-investing approach. This is why I believe the Canadian marketplace is a premier global destination for active investment management. So much investment in Canada is focused on the biggest players by the biggest players that wide portions of the market go under-analyzed, presenting a compelling opportunity for more engaging and nimble strategies.
Most importantly, we should keep in mind that asset management is a dynamic process where the largest firms of today will be eventually replaced by the best firms of tomorrow.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.