A relatively small number of funds have attracted a large share of capital in recent years, and that could mean trouble, according to Russel Kinnel, an analyst with Morningstar in Chicago.
In fact, in the past six years, the number of funds with more than $1 billion under management has swollen from 730 to 1,123. Kinnel counted funds with multiple share classes as one fund.
Small caps, although they are least liquid and, therefore, most prone to changes in class and cost as a result of large influxes of cash, have delivered strong returns for the past six years. As a result, they have been especially popular with 81 billion-dollar-plus funds trading today, compared to 36 in 2000.
"If you thought you were the only one having a hard time finding a good small-cap fund, foreign or domestic, that was still open and not too bloated from assets, think again," Kinnel told investors.
A survey of the median dollar value at which funds close to new investors shows that the figure for small caps is $800 million, for mid-caps, $3 billion, and for large-caps, $18 billion.
If an investor is considering a fund that had assets approaching any of these thresholds, Kinnel added, he suggests looking at indicators such as turnover, research, and the individual fund manager's other commitments. If funds are trading at high volume, and are approaching any of these median-closing levels, beware, he said.
Fund managers who have few analysts or little support may not have research adequate to make timely decisions, so the more assets the fund takes on, the less control the manager may have. Likewise, if the firm for which the fund manager works has one analyst working for several different funds, it may make for a crowded market, since several different groups of shareholders are taking directions from the same source.
Finally, Kinnel told investors to be aware of how many funds their manager manages.