2015 U.S. Lipper Awards focus on funds with steady returns
(Story refiled to correct spelling of Hotchkis in final paragraph)
NEW YORK When sizing up a mutual fund, investors might want to ignore size all together.
That is because 21 of this year's 37 2013 U.S. Lipper Fund Award winners have less than $1 billion in assets under management, putting them squarely below the typical cutoff for what is considered a large mutual fund. And it is not simply smaller funds from large firms that made the cut. Along with offerings from mega-brands such as Wells Fargo & Co and BlackRock Inc, funds from little-known firms such as New Orleans-based Villere & Co and Memphis-based Southern Sun Asset Management earned awards in their categories.
Smaller funds have several advantages over big ones, assuming that a portfolio manager is good, of course. Portfolio managers in these funds are less likely to influence the price of an asset when buying or selling, which often translates into more profits for investors. A fund's relative obscurity also means few other investors will attempt to front run it, the term for attempting to profit by anticipating what a fund will buy or sell and doing it ahead of time.
And most importantly for investors, a smaller fund manager might simply have better ideas.
"The larger you are, the more difficult it is for you" to generate market-beating ideas, said Marcin Kacperczyk, an assistant professor of finance at New York University's Stern School of Business who focuses on mutual funds. "If you have too much money to manage, you are using the first dollar to find a good pick, but the subsequent picks are naturally worse."
George Young, a portfolio manager of the $303 million Villere Balanced Fund, has noticed the downside of building an asset base. His fund had just $56 million in assets in 2008, but began attracting more investor dollars as it delivered an annualized gain of 10.1 percent during the last five years, about 6 percentage points more than the average fund in its category.
Although those dollars make the fund more profitable for the firm, they complicate the day-to-day investing process, Young said.
"Now, we have to be very aware of how much we're buying or selling and often have to spread it out over a couple of days," especially when it comes to small or mid-cap stocks that are thinly traded, Young said.
One of the most recent additions to his fund, developer Howard Hughes Corp, has an average daily trading volume of just 178,831 shares, complicating Young's ability to buy as many shares as he needs without pushing up the price.
No wonder, then, that small funds tend to outperform in the small-cap category, said Tom Roseen, head of Lipper's research services in Denver.
The Huber Capital Small Cap Value fund earned the Lipper award in its category with $74 million in assets under management, while the SouthernSun Small Cap Fund won the small-cap core award with $398 million in assets.
There are drawbacks to a small asset base, of course. Trading costs and annual expenses could be higher at a firm with low assets, while portfolio managers might have less access to broker research or the ability to generate their own original reports.
Investors are best served by investing in small funds from large companies, said Joseph Chen, an associate professor at the University of California, Davis. The economy of scale from a large firm translates into lower costs, while the small asset base gives managers more flexibility, he said.
Among this year's fund winners, the $162 million Wells Fargo Advantage Intrinsic World Equity Fund and the $188 million John Hancock Core High Yield Fund fall under that guideline.
Small funds that win awards do not tend to stay small for long, which can test a portfolio manager's skill, said Lipper's Roseen.
"It's how portfolio managers deal with that fame and fortune that determines whether they're successful in the transition to becoming the next Fidelity or Vanguard," he said.
(Reporting By David Randall. Editing by Lauren Young and Andre Grenon)