Big is not necessarily bad when it comes to mutual fund management.
The Center for Due Diligence, Oak Brook, Ill., tested the commonly held notion that the greater a mutual fund's assets, the more likely the equity portfolio manager will be less efficient.
While the center concluded a small company might lack the necessary infrastructure to cope with large inflows of assets, it found performance of the megafunds is still fairly good.
The 25 largest equity funds underperformed the Standard & Poor's 500 Stock Index during 1994, but outperformed Morningstar's Equity Fund Average. The 25 biggest stock funds outperformed both indexes over the three-, five-and 10-year periods ended Dec. 31, 1994, the center found.
During 1994, four (16%) of the largest equity funds beat the S&P. For the three years ended Dec. 31, 20 equity funds (80%) beat the S&P. The compound-average return of these funds was 9.12%, 2.84 percentage points above the S&P and 1.91 percentage points above the Morningstar average for the same period.
Over the five-year period, 15 (63%) of the largest funds beat the S&P 500, with a compound-average return of 10.17%, or 1.47 percentage points above the S&P. They outperformed the Morningstar index by 1.91 percentage points for the same period.
Over the long haul, however, only 48% - or 10 - of the largest funds beat the S&P 500. The funds' compound-average 10-year return was 15.03%, 0.64 percentage points over the S&P and 2.6 percentage points over the Morningstar index return.
