Bigger investment managers are not always better by Michael Sadoff of Sadoff Investment Management
Many people feel comfort in numbers, and knowing that their investment advisor or mutual fund manages several billion dollars with thousands of other investors can be comforting to some investors.
But what the average investor doesn’t realize is that investing with these large entities often comes at a price. An analysis of the 10 largest actively managed equity mutual funds’ performance in 2008 shows that the best performer lost 33 percent, while the average lost 39 percent. This compares to a 37 percent drop in the S&P 50. The average fee of these top 10 funds, which on average have nearly $50 billion under management, is close to 0.8 percent.
Many of these funds have difficulty moving markets. If they sell their largest stock holding, often a $1-2 billion position, they will cause downward pressure on the stock price, which negatively affects their performance. In falling markets like 2008, many of these funds decided not to exit the market and raised cash. What the investor ends up with in these mega-funds is often a “closet index fund” with fees that are nearly eight times more than buying an actual index fund.
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