Thursday, August 20, 2009

Size does matter in mutual fund selection

It was mentioned before that when choosing which mutual fund to invest in, it is more important to choose the fund manager rather than the funds. However, most of the times the fund manager is not a single person. In most established mutual fund businesses, the fund manager itself is a team of people. Although sometimes there may be a single person making all the investment decisions but as time goes, business expands, number of funds to manage increase and that person will eventually need to delegate, either to a system or other people.

So how to analyse the fund manager then? Well, in that case the fund manager is actually the company, so we analyse the company itself.

Investment is a money game. You use money to earn more money. If you have the right strategy and little money, you would probably make some money. But if you have a lot of money to start with, you probably make so much more when your investment decision is right. Earning 100% from $1 gives you $2, but earning 100% from $100 gives you $200. The earn ratio is the same, but it is a huge difference between $1 and $100 ...

When you make a mistake losing all your money, you are dome. But if you have more money, you can apply money management so that you have some reserve funds to try again, especially to cover your previous mistakes. So more money gives you more number of investment trials.

As mention before, the higher amount usually also implies lower fee in most investments. You can buy stocks with $100 but your cost can be as high as 8-10%. But if each of your transaction is above MOTS : Minimum Optimized Trading Size ie. $20,000 then your fee is lower than 1%.

So Size Does Matter and the primitif requirment for a fund manager to perform is to have a large sum of capital.

In order to keep mutual fund as a passive investment tool ie. simplest decision making, we can simply pick the largest mutual fund company to invest in. In Malaysia, its has been deadly simple in this aspect, Public Mutual is not the obvious choice but the only choice when size is concern, too bad.

According to Liper Fund, as of 22 June 2009 these are a total of 68 millions of unit trusts managed in Malaysia. The fund sizes managed by various Malaysia Unit Trust Management Companies are as followed;
28 millions Public Mutual
8 millions AmInvestment and CIMB
3 millions OSK-UOB, Prudential
2 millions HLG, Hwang-DBS
1 millions ING, Pacific, MAAKL
So the truth of using mutual fund as the highest return passive personal finance tool is as simple as buying Public Mutual every month automatcially using a Standing Instruction ie. apply the DCA - Dollar Cost Averaging technique. This recommendation has been true for the past 10-20 years and most likely to be continue correct for the next 5 years.

To further show the confidence on this recommendation, anyone who has had a Public Mutual fund with DCA applied. If you are still NOT happy after 3-5 years, contact me for a potential total buy out of all your investment units.

It will take a while for 8 millions to catch up with 28 millions. However, not impossible. If you have been watching all the mutual fund companies growth for the past 10 years like I have, the growth of OSK and Prudential are really significant.

If for whatever reason Public Mutual is NOT an option for you, the other choices following this same argument would be CIMB from the banking industry and Prudential from the insurance industry. While CIMB's size stands side to side with AmInvestment but Prudential is way ahead of other insurance oriented mutual fund companies.

How about which funds to buy ? Well, following this same argument, we should buy the largest fund size funds. And that usually means NOT the NEW funds. Most of the older funds have bigger fund sizes. Believe it or not, some of the recommendations based on performance here are actually some of the oldest funds too.


Anonymous said...

"bigger fund size allows the manager to cover their mistakes with other monies the fund have, compare to smaller funds which the manager may not have the priviledge to do so" - In my opinion, that is correct to a certain extent, as each 1% mistakes the manager made in larger fund size, caused the fund to lose even greater, comapare to smaller funds.

Another point to take note on the large fund size is that, the manager has no choice but to buy more variety of stocks (sometimes >50-60 stocks), which makes the fund perform like the index itself, therefore mimicking the index/market performance, rather than outperforming it. In this instance, one might as well go buy ETF or index fund, which has lower fees...just my opinions.. :) Nice post, Michael, :)

Michael Tsen said...

1% lost in 1 billion may sounds bigger than 1% lost in a million, but its practically suffer the same for the investor, ie. 1% lost in my $1,000. but bigger fund has more rooms and methods to recover that 1% lost compare to smaller fund who has limited.

the subsequent points are very true, however its not a matter of fund size. any manager who increase variety simply because they have more money is a manager that you should ditch right away, no matter what fund size they are managing. They are just NOT doing the right things.

Rajesh said...

Nice post on Mutual Fund.
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