In ‘Goldilocks and the Three Bears’, Goldilocks enters the Bears’ house and tries their porridge, chairs and beds until one proves to be “just right”. What can investors learn from this when thinking about the right size for a fund to consider making an investment?
When analysing a fund, much of the focus naturally falls on performance, philosophy and process – the core pillars of fund research. However, one variable that can have a profound impact on outcomes is fund size. If a fund is too small, costs become an issue. Most fund expenses are largely fixed. As a result, smaller funds often suffer from a higher total expense ratio, which acts as a drag on performance. Excessive size can be just as problematic. As a fund grows, the opportunity set available to the manager often shrinks. This is especially true for active strategies that rely on security selection, tactical positioning, or exploiting less-liquid areas of the market.
Large funds face liquidity constraints that smaller funds simply do not. Taking a meaningful position in a mid- or small-cap stock may require days or weeks of trading, increasing market impact costs and information leakage. Over time, this can lead to a more static portfolio, reducing the manager’s ability to act decisively and diminishing potential alpha.
So is there a right size for a fund? Fund size is not inherently good or bad. Rather, it must be assessed in context: the fund’s strategy, its investable universe, market liquidity, and the way in which the manager generates alpha. A fund can be too small, too large, or just right: understanding where it sits on that spectrum can materially improve research conclusions – something we pay a lot of attention to.
