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Unit Trust Size: Does It Matter?

11 August 2017 No Comment

Selecting the right unit trust can be tough. There are thousands of registered unit trusts with an assortment of investment styles and strategies to choose from.

Investors and advisers often wonder whether they should consider the size of the fund. Some funds are almost 80000 times bigger than the smallest start-up fund. Investors are left pondering what impact this difference in size has on returns. Is the size of a fund important when choosing a unit trust? Let us explore:

Theoretically, the size of the chosen asset manager matters

Large asset managers are generally forced to adopt a long-term approach when it comes to selling and purchasing positions. Small asset managers can rapidly alter the appearance of their portfolios: They can easily allocate substantial portions to the shares of any company. Large asset managers tend to be constrained: Large portions of their portfolios are invested in the shares of large companies, which can impact the prices of these shares in the market.

Large fund managers tend to have more assets to invest. This forces them to hold positions in shares they wouldn’t ordinarily hold. Both the amount of shares available for purchase and market capitalization grows over time. Thus one should consider the quantity of shares a manager invests in and the level of assets managed relative to what the stock exchange has available.

Scale can be beneficial. It can help managers stay in business and adhere to their investment philosophies during periods of poor market conditions, over which they have no control. This is a luxury small asset managers don’t have. Superior research, which large asset managers have access to, may also translate into better long-term performance. Some asset managers, however, are not large or small by luck or choice: Some are large managers due to skill and are able to deliver attractive flows and returns. On the other hand, some are small because they lack the skill and fail to attract assets.

Is size relative?

Large funds are able to take different positions in their realm of potential investment. Typical market capitalization is about 100 times larger than the biggest fund. Its assets are invested in shares, bonds, cash and internationally. This means that even the largest funds will have differing performances and that fund positions will deviate from the index, regardless of its size.

Is there evidence to support the theory?

There is, as of yet, no evidence correlating performance and asset level under management in the market. No evidence of any correlation, either negative or positive, between the size of a fund and its performance has been observed.

In fact, it was found that the returns generated by large funds didn’t deviate less (and thus conform more) when compared with a suitable benchmark of the returns generated by smaller funds.

Basic guide to choosing a unit trust manager

Size may not be a concern, but you should consider the following:

  • Find management companies with proven track records detailing long-term success. Fund managers will, on average, underperform index benchmarks after fees have been deducted. This must be so: If the performance of the fund manager equals the benchmark, then they will underperform the benchmark after fees are accounted for. Very few managers outperform the index. Therefore investors would want to invest in the best performing unit trusts to offset the associated management fees.
  • Find a management company who attracts the best people. It must have a proven process and philosophy, which is consistently applied. This will have a far greater impact on performance than the size of the unit trust.
  • Utilize the quality independent information available to you. Read up on the evaluations performed on unit trusts by ratings agencies.
  • Avoid switching. Switching can destroy value, as one tends to move from a fund doing poorly to one doing well, which locks in losses. Aligning yourself with a manager with a proven track record will help you to avoid emotional decisions during periods of poor performance.
  • Seek out advice. This is a complex task. Consulting an independent financial advisor will help reduce some of the confusion and stress.

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