Mutual Fund Tracker: Small Is Beautiful

by: Kevin S. Price

We've long argued (here, here, and here, for example) that most big mutual funds are a rotten deal for individual investors. Due to their size, trading costs, and diversification, many of these funds end up behaving like very expensive index-trackers over full market cycles.

Most of the evidence we've pointed to has focused on big, lumbering laggards. Yesterday's Wall Street Journal featured a story on the best-performing funds in the first half of the year, and the upshot is clear: Small is beautiful.

While their names mightn't be familiar to many investors, there were some stock funds that delivered stellar returns over the past year.

Among the seven best-performing funds in the 12 months to July 31, none is from the 25 largest mutual-fund companies and none of the funds has more than $700 million in assets, according to data from Morningstar Inc.
Despite the market downturn that saw the Standard & Poor's 500 Index lose 22% during the 52-week period, the seven funds, all of which invest in long-only securities and are mostly invested in stocks, have seen double-digit returns.
Six of the funds use "value" strategies, while four have concentrated portfolios and held fewer than 40 stocks, according to the most recent data. The figures suggest investors should take note of smaller funds, if nothing else than for their ability to be more flexible in challenging markets.



Sam Mamudi, "Top Funds' Traits: Strategy and Size," Wall Street Journal, August 6, 2009