A funds real handicap -yet rarely explained.
To run a typical fund you need to have at the very least 50 to 100 million US$ under management. Hence most all managed funds' hands, are tied in owning only larger capitalized stocks.
This is so because the regulatory, administrative, fund
manager & assistant salaries, travel and other expenses cost hundreds of
thousands of dollars per year. A fund typically charges a management fee based on
assets under management and a bonus if the performance is good. A good fund managers’ salary is never low.
If a fund is smaller than a certain threshold the % management
fees etc..(and even if there is a bonus) simply does not cover those fixed expenses
-and so makes it un-viable. This is the simple reality.
Fact is, most funds
have much larger capital amounts under management often a billion $ or more. Most funds also cannot realistically
cover more then 30 stocks and few even own this number. Investment finance proves that a portfolio of
7-9 stocks already diversifies the so called systematic risk, through
diversification. Any more picks do not help much at all to reduce stock risk through further diversification.
(This can be proven in finance).
Hence a
fund manager has no real interest or professional incentive to diversify more
than say a dozen or so stocks picks. In practice most funds may own more but such added numbers in different stocks only create more
research headaches -even while it just does not reduce much at all the portfolio risk!
By owning too many shares the fund simply
diversifies away ones’ good/best ideas and so likely will just perform in line with
the overall market index, hence no bonus. For these reasons and more a fund is not
inclined to fill up a portfolio of too many different stocks!
Take the example of a 100 mill US$ mutual fund (very small by any standard), divide this by
say 12 different equal picks and by
simple arithmetic it owns 8.3 mill. US$
per stock. (100 mill. divided by 12).
That is 275 million Thai Baht, per stock pick.
If you take DEMCO as the prominent example this would come to be 40
million shares at the current price! Can
any of you whom even casually follow this stock imagine acquiring 40 mill.
shares of DEMCO without moving the price? And DEMCO is a mid cap, or just about
in the top "100 SET" index. Nobody knows,
not least the fund manager, what the average price would be if an institution
would try to acquire 40 mill shares of this stock? Hence there is a real pricing risk to the
fund investor.
Also imagine it wants to
sell these shares out one week, again a huge risk of liquidity. Liquidity is a very relative concept...but where
you and me don’t have this risk, but all institutions truly have and it’s a risk
they can’t quantify! Non-quantifiable/assessable
risks are the "kiss of death" to a fund manager. A fund manager can get fired by the funds' board of directors if they get stuck on a relative low liquidity stock which they can't all unload on a moments notice.
Now imagine this fund wanted to own Thai smaller cap shares;
impossible as there simply is not enough liquidity for a fund in any of those shares. And mind you, this is for a small institutional
fund of only 100 mill. US$, when in fact
most funds run far, far larger assets under management then this!
Over the years I have looked at some of the
so called “smaller cap global growth funds” or other such given misleading names.
And what I never see in their stock holdings
(fully disclosed in their prospectus), are truly smaller cap Thai stocks. Even
while they state they do. Next time you run
into such an acclaimed fund: first, look
how large the fund is and second, look at their prospectus on what they own. I just about guarantee you it will be mid to big
cap stocks regardless of what they state. I.e. the very segment of the market which over time regularly underperforms stock
market indexes, as is evidenced yet again by the previous member article posted here.
Obviously it is not in the interest of such funds (and their
gnomes or owners) to disclose this real and present handicap! And since they are big
advertisers and more so to the press, its not in these interests' either to write or
explain the above. And in fact they
never do to my knowledge.
Paul A. Renaud.
