Smaller taste's great and is less filling.

PaulRen's picture

Here once again I dare to address the often -besides never reported- misunderstood reasons why size matters and is often a detriment when it comes to managing money. 

Below is a message I received from free-registered user which I chose to answer below as its often this kind of wrong understanding -which the mainstream media never addresses and so is highly misunderstood:

"Most investment advisers, money manager and fund manager cant even beat the  market . Check out the link below .Warren Buffett won even a famous bet .

Warren out performed a famous hedge fundmanger with simple index fund of Vanguard etc..  A study by Vanguard found that 18% of active mutual fund managers beat their benchmarks over a 15-year period.Sep 23, 2563 BE "


To be a legitimate besides profitable managed fund it has to have at the very least 100 mill. US$ under management, or it just can’t operate at a minimum profit.  The ever higher admin. & regulatory costs, the fund manager(s) full time compensation, offices and yearly audits & filings and custodian fees, insurance etc. just add-up to prevent anything smaller than this to be worthwhile.  In fact, the average fund is much, much bigger than that. This is their real handicap as it means the average amount invested per stock has to be in the millions of $ to make it worthwhile.  As you just can't practically manager hundreds of different stocks in a portfolio.  Hence most stocks are off their radar screen simply and only due to (smaller) market cap size!   Especially in SE Asia where smaller and mid-sized companies make up 70% or more of their GDP.  Yet these are the real backbone economy, all but ignored by these institutions and ETF funds alike. 

For this (all but ignored), these often trade at p/e discounts and yield far higher dividends as compared to their big cap counterpart.  Simply stated they “taste great and are less filling”, not least overall they are often faster growing. Its the norm that a smaller company can grow fast than a big mammoth.  Of course its not to the institutions interest to point their own limitations out, as they can’t participate.  Because they must be ignored by most money and fund manager, strictly on size, this smaller cap. sector has over the many years become under-researched and under-owned and here represents a real market-inefficiency -to be explored by informed individual investors.  Its one of the few times in this world where being small is an advantage!  Smaller cap stocks in Thailand (except for the years 2017 to early 2020) have vastly outperformed the SET index, as I here have shown again and again.  Yet, the gnomes never show SET performance listed by market cap., as yourselves why. :)

So when performance comparisons are made to ETF funds, no wonder such (big) money managers have a hard to time to compete -as in addition they often hold some cash on hand (in case of a market set back) which ETF funds do not.  ETF funds by definition are always fully invested.  Further, in the past 10-12 years US stocks have mostly rocketed up, so any money manager which took less than market risk, by holding some cash, ended-up underperforming.  Dont' confuse bull market with brains, or risks taken.

As to Warren Buffet, to me his time has peaked and he should retire.  His fund is bloated with every year more billions of cash holdings, for long already, his fund pays no dividends which is claimed is for tax reasons -as dividends are taxed higher then capital gains.  But this hides the fact that an ever-growing mega bloated fund receives ever growing yearly mgt fees, so is it not in their interest to hoard capital, rather than paying some out?   He mostly missed the superb tech stock boom (yea, except for his Apple stock). US tech stocks have by far, far lead US market indexes for some years now, by a multiple factor of 3-5.  I guess he prefers railroads or Coke etc..  I know it is not in fashion to think W. Buffet has peaked, but I do for many reasons, not least all the mass media attention he gets.  Its way overdone and over hyped.  His fund is the ultimate swollen fund which has to ignore all but the largest companies, only due to its bloated size, as recent returns show.

Best Regards,

Paul A. Renaud.