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Mutual Fund Investing - Part Six
Apr 30, 2006 - Thinking of investing through mutual funds? This series of articles discusses how to select mutual funds that will outperform their benchmark, the pros and cons of mutual funds, and alternatives...
Education Thinking of investing through mutual funds? This series of articles discusses how to select mutual funds that will outperform their benchmark, the pros and cons of mutual funds, and alternatives. Mutual Funds: Part Six See part one. See part two. See Part Three. See Part Four. See Part Five. A recent paper published in The American Economic Review, and authored by Joseph Chen, Harrison Hong, Ming Huang, and Jeffrey D. Kubik investigates the relationship between fund sizes and returns. The authors find clear evidence that smaller funds perform better than larger funds. Interestingly, however, they find that funds that belong to families with a large amount of assets under management (AUM) tend to perform better than funds in families with a small amount of AUM. The authors partially attribute the strong performance of small funds relative to large funds to “organizational diseconomies related to hierarchical costs;” they argue that large funds are more likely to have hierarchies that force analysts within the fund to expend energy trying to have their ideas implemented (rather than focusing on research). They also attribute the strong performance of small funds to liquidity benefits; they find that size is especially important for funds that invest in small-capitalization stocks; this supports the liquidity argument. The authors suggest that funds that belong to fund families a large amount of AUM may result from the benefits that funds receive from decreased transaction costs and improved lending fees revenues; they argue that hierarchical costs do not exist on the family level. The Key Message: Please note that our earlier article showed that diversified fund families are generally a bad sign for future performance. (Read it.) The trick is to find fund families that do not have a diversified set of funds, but have a large amount of AUM, and a small fund. Reference: Chen, Joseph, Harrison Hong, Ming Huang, and Jeffrey D. Kubik, “Does Fund Size Erode Mutual Fund Performance? The Role of Liquidity and Organization,” The American Economic Review, Vol. 94, No. 5, Dec 2004. Analyses of Sectors BBH: Bullish. (Biotechnology)
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Disclaimer: Please note that charts and commentary provided by the moderator are for educational purposes only. Any trades placed upon reliance on the moderator’s charts or information is taken at your own risk for your own account. Past performance is no guarantee of future results. While there is great potential for reward trading stocks, futures and options, there is also substantial risk of loss and you must decide your own suitability to trade. Future trading results can never be guaranteed. This is not an offer to buy or sell stock, futures, options or commodity interests. Most trading systems are based on historical formulas which have worked in the past. However, what has happened before may or may not happen again. You can lose all your money trading stocks, futures, and options and you must decide your own suitability as to whether or not to trade. Only trade with true risk capital you can afford to lose. Only trade markets you can properly afford to trade. Properly funded trading accounts typically perform better than those that are not. Never risk more than 2-3% of your account on any one trade. Always define your risk before entering a trade and place a stop to limit your risk. There are no guarantees or certainties in trading. Trading involves hard work, risk, discipline and the ability to follow rules and trade through any tough periods during a system’s draw downs. If you are looking for a guarantee, trading is probably not for you. Most people lose money trading. One of the reasons is that they lack discipline and are unable to be consistent. A system can help you become consistent. Ironically, worrying about the monetary aspect of trading can contribute to and cause a trader to make trading errors. Therefore, it is important to only trade with true risk capital.
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