With the deadline just over a month away for investing our annual allowance in a stock market individual savings account (ISA), investors are mulling where to put their money.
All sorts of things come into the equation. Which market does the unit or investment trust fund invest in? Who is the manager and what is the past performance? But there is a facet to unit and investment trusts that is often overlooked: the amount of money in the fund.
When it comes to this type of investment, size really does matter – but not in the way you might expect. All else being equal, the bigger the fund, in terms of money invested, the poorer will be the prospects of the fund manager beating the stock market.
"Whether a fund is big or small depends on the sector it operates in, but generally a UK fund that invests in big companies can be considered small if there is less than £1bn invested in it," says Mark Dampier from independent financial adviser (IFA) Hargreaves Lansdown. "For funds that invest in companies based overseas, the ballpark figure for what constitutes a big fund is anything over £500m."
Using Mr Dampier's "ballpark" figures, the independent investment research firm Morningstar has shown that the top performers over the past three years are nearly all classed as "small". For example, of the 20 best-performing UK funds, 17 have less than £1bn invested – some substantially less. The picture is replicated with overseas funds. All but five of the 20 best performers – among which, Far Eastern and Latin American funds feature strongly – have less than £500m invested.
"Larger funds are much more cumbersome to run," says Chris Traulsen, a director at Morningstar. "If the manager of a big fund wants to change his strategy, he will have to buy much more stock to get the same effect than a smaller fund – [and] moving large amounts of money around takes much longer."
In short, larger funds are less nimble than smaller ones and slower to sell underperforming shares or react to buying opportunities. Even when a manager of a larger fund makes a killing on a particular share, any profit made may only be a drop in the ocean relative to the size of the fund.
"There are plenty of high-performing managers of large funds but that's because they are good full stop," says Mr Dampier. "I suspect they would do even better if they managed a smaller, more flexible fund."
Philippa Gee of IFA Torquil Clark argues that it takes a different skill to manage substantial sums of money. Some fund managers struggle to cope with this level of complexity.
But not all is rosy for smaller funds. They are just as vulnerable to poor management as large ones and don't have the resources of their bigger brethren.
"Smaller funds are often the better option," says Mr Traulsen, "but you must ensure the fund has good resources and research."
And there are many examples of big players proving their worth. "There are some excellent huge funds such as Fidelity Special Situations, Invesco Perpetual Income and Jupiter Income Trust, all of which I'd happily recommend, even though they're the oil tankers of the investment world," says Anna Bowes from IFA AWD Chase de Vere.
All in all, fund size seems to have a bearing on performance but it is only one factor among many for investors to take into account.
"Just as you need a balance of different holdings, you also need a mixture of fund sizes," says Ms Gee. "This means that you end up with a more sustainable long-term portfolio."