Why bigger funds are often not better performers

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Investing in smaller cap stocks is riskier, but they have tended to outperform larger cap stocks over longer periods

Few dispute the power of a strong brand. During a trip to the supermarket we place a bottle of branded tomato sauce into our trolley instead of the supermarket’s private label brand, even though it is more expensive. This though the taste of the private label brand may be more similar to the branded product than we realise.

Despite great performance in the past it is hard to dispute that the size of asset managers is an additional headwind to them outperforming their benchmarks, no matter how talented they may be. Let me illustrate by way of an example.Association for Savings and Investment SA Practically speaking this causes the investment universe of a fund that has R40bn under management to contract to 155 companies out of the 372 companies listed on the JSE. The list of companies that would in effect be uninvestable because their market caps are too small, would include Spur, Kaap Agri and Combined Motor Holdings.

 

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