It is usually seen that as the size of the portfolio increases the performance goes down. Warren Buffett also once said “I can easily generate 50% return if I have to manage only a million. But when I am managing 100 billion even 15% is very hard“
Performance decline is also visible in Mutual Funds with very high AUM.
The biggest benefit of small AUM is the flexibility to move in and out of stocks swiftly. A fund size with Rs 40,000 crore assets under management, will have to sell stocks worth Rs 400 crore to offload 1% of holdings which could take a few days or a week, depending on the liquidity. Similarly, a fund with Rs 400 crore assets has to sell just Rs 4 crore worth of stocks to offload 1% stake.
That is why as the size grows, it is commonly seen that funds are putting more money into large-size companies to maintain that flexibility of buying and selling. Most of such large-size companies are usually not the high-growth companies.
Size could become a serious problem for funds that have a fixed mandate to invest in a particular market cap, for instance, mid-cap and small caps, where the opportunity set becomes limited many times.
Due to this, many times such funds stop accepting fresh inflows or lumpum investments. As we have seen in the case of SBI, DSP, and a few others.
How to know that AUM size is too high to manage
There is no proper definition of how big is too big. However certain indications are there that show the fund manager is finding it difficult to manage the AUM.
- 100+ stocks in the portfolio
- Allocation of less than 1% capital in most of the top 10 stocks
- Very high allocation in against the theme stocks. Like smallcap fund allocating high in largecap companies.
Please note size is not the only criterion of fund performance and there can be many other factors as well. So, do not judge everything on AUM size alone