In the Indian context, as of now, fund size has not posed to be a problem
The size of a fund really does not have much impact on its performance, however, a large-sized fund may lose flexibility
As the size of the fund increases, fund managers tend to back away from their flirtation with concentrated bets and are forced to court diversification. HDFC Equity, one of the largest funds in the country, is a classic case in point. In its earlier days, the fund would get by with just around 20 stocks. This was in December 1999 when its corpus was around Rs 50 crore. Its favourite stock - Infosys Technologies, had an allocation of 20 per cent at that time. Not so any longer. Seven years later, the fund’s assets burgeoned to Rs 4,000 crore and the number of stocks rose to 38 with the highest allocation at 9 per cent (December 2006). Currently, the portfolio now sports around 56 stocks with the highest exposure at around 10 per cent.
“When one migrates from a lower asset base to a higher one, the implied passivity increases,” says the fund manager of a fund that has crossed Rs 2,000 crore. “It’s not passive per se, as in the case of an index fund, but it definitely restricts agility when compared to a smaller offering.” He immediately stated that he did not want to be quoted in case his investors lose faith in him. What he is trying to say is that it is tough to liquidate a 5 per cent position in a large fund, but that would never have been a problem when his fund size was much smaller. Strong and swift moves are difficult to implement once the corpus starts ballooning.
Let’s say the fund’s portfolio is Rs 100 crore and the fund manager wants to bet on Stock A which is a small-cap, illiquid one. If he takes a 2 per cent exposure, it would amount to Rs 2 crore of the corpus. Now if the same fund manager is managing a corpus of Rs 1,000 crore, he might shudder at taking a 2 per cent exposure, because this time it would be valued at Rs 20 crore. The price impact of the trade would hold him back. He is more capable of buying and selling Rs 2 crore worth of stock without significantly impacting the price, than in the case of Rs 20 crore. So while the fund manager’s investing strategy does not change, it gets more difficult to execute certain ideas. Tactically, this poses to be a limitation. Moreover, the opportunities get more limited. A smaller fund, on the other hand, has a much wider universe and can take stronger bets. Taurus Starshare, during its heady days, for instance. Between October 2005 and March 2006, Jai Prakash Associates and Crompton Greaves tog ther accounted for 50 per cent of the fund’s portfolio, the maximum size of the portfolio touching Rs 155 crore. In January 2006, Jai Prakash Associates was the top holding of the fund with an allocation of 33 per cent. It did well that year and so did the fund. But on the flip side, the portfolio is also inherently risky when the fund manager takes such bold bets.
So a fund manager may have no problem in aggressively positioning his portfolio by taking huge positions in stocks, even if they are substantially illiquid, if his corpus is tiny. If his bets play out well, the returns could be fabulous. This leeway changes with the size of the corpus. In the September 2010 portfolios of equity funds, there were six fund houses that invested in Ahluwalia Contracts. When the stock price began to fall because of the controversy regarding the company’s role in the Commonwealth Games, a fund manager confessed to having a problem exiting the stock because of his substantial holdings.
-- Dhirendra Kumar
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The size of a fund really does not have much impact on its performance, however, a large-sized fund may lose flexibility
As the size of the fund increases, fund managers tend to back away from their flirtation with concentrated bets and are forced to court diversification. HDFC Equity, one of the largest funds in the country, is a classic case in point. In its earlier days, the fund would get by with just around 20 stocks. This was in December 1999 when its corpus was around Rs 50 crore. Its favourite stock - Infosys Technologies, had an allocation of 20 per cent at that time. Not so any longer. Seven years later, the fund’s assets burgeoned to Rs 4,000 crore and the number of stocks rose to 38 with the highest allocation at 9 per cent (December 2006). Currently, the portfolio now sports around 56 stocks with the highest exposure at around 10 per cent.
“When one migrates from a lower asset base to a higher one, the implied passivity increases,” says the fund manager of a fund that has crossed Rs 2,000 crore. “It’s not passive per se, as in the case of an index fund, but it definitely restricts agility when compared to a smaller offering.” He immediately stated that he did not want to be quoted in case his investors lose faith in him. What he is trying to say is that it is tough to liquidate a 5 per cent position in a large fund, but that would never have been a problem when his fund size was much smaller. Strong and swift moves are difficult to implement once the corpus starts ballooning.
Let’s say the fund’s portfolio is Rs 100 crore and the fund manager wants to bet on Stock A which is a small-cap, illiquid one. If he takes a 2 per cent exposure, it would amount to Rs 2 crore of the corpus. Now if the same fund manager is managing a corpus of Rs 1,000 crore, he might shudder at taking a 2 per cent exposure, because this time it would be valued at Rs 20 crore. The price impact of the trade would hold him back. He is more capable of buying and selling Rs 2 crore worth of stock without significantly impacting the price, than in the case of Rs 20 crore. So while the fund manager’s investing strategy does not change, it gets more difficult to execute certain ideas. Tactically, this poses to be a limitation. Moreover, the opportunities get more limited. A smaller fund, on the other hand, has a much wider universe and can take stronger bets. Taurus Starshare, during its heady days, for instance. Between October 2005 and March 2006, Jai Prakash Associates and Crompton Greaves tog ther accounted for 50 per cent of the fund’s portfolio, the maximum size of the portfolio touching Rs 155 crore. In January 2006, Jai Prakash Associates was the top holding of the fund with an allocation of 33 per cent. It did well that year and so did the fund. But on the flip side, the portfolio is also inherently risky when the fund manager takes such bold bets.
So a fund manager may have no problem in aggressively positioning his portfolio by taking huge positions in stocks, even if they are substantially illiquid, if his corpus is tiny. If his bets play out well, the returns could be fabulous. This leeway changes with the size of the corpus. In the September 2010 portfolios of equity funds, there were six fund houses that invested in Ahluwalia Contracts. When the stock price began to fall because of the controversy regarding the company’s role in the Commonwealth Games, a fund manager confessed to having a problem exiting the stock because of his substantial holdings.
-- Dhirendra Kumar
-----------------------------------------------------------------------------------------------------------------
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