Incentives Are Fun
Weird topic, but okay. Daniel Gross says
: "When mutual funds grow too big, they become unwieldy." Well, probably. But why is that? He says "the law of large numbers dictates that it's difficult to sustain performance and growth when you're really big." Aren't there more specific reasons though?
If a fund grows large enough, after all, the number of stocks available for the manager to select shrinks. (A $2 billion fund looking for, say, a 5 percent holding in various companies [anything else is probably too big to acquire/sell] would have thousands of companies to choose from; a $100 billion fund doing the same can only choose from a handful of very large companies.) Plus, for very large funds, transactions either become more expensive or else will taper off, because of various fees and the like. At a certain point, a large enough fund will effectively be tracking the market, in which case investors get a very bad deal—basically, they receive market return minus the large fees the managers siphon off. The phenomenon Gross is describing isn't just likely
; it seems pretty much inevitable. Maybe there are other theories out there.
Sadly, I don't invest in anything. If I did, I can't see why mutual funds would be a good deal. By design, the interests of investors and managers are badly misaligned. Managers will generally prefer to boost their own fees as high as possible, and to expand their funds as much as possible, both of which are bad for the investor. Plus money spent on marketing and advertising. This goes double when some other large financial conglomerate buys up a fund, or if the fund goes public. The shareholders and/or buying corporations are only going to get a nice fat return if the fund managers boost their fees and whatnot. Maybe someday it will all get reformed but that doesn't seem to have happened yet.