Large mutual funds never fail to impress with the amount of assets under management they manage (usually in the billions) and their large presence and clout in markets.
However, large also implies lumbering, as smaller investors can eke out advantages over these behemoths by being nimbler and more flexible.
Here are three advantages which retail investors have over large funds.
Pressure To Report Short-Term Performance
Funds have a reporting requirement to their clients, and most of them provide fact sheets and statistics on how the portfolio is doing monthly. This regular reporting requirement puts pressure on the fund manager to deliver decent numbers so that clients are appeased and do not bombard them with lots of questions.
Problems arise when fund managers face stress to report good short-term numbers even while trying to invest for the long-term. Retail investors do not face such issues as they only have themselves to answer for.
Size And Liquidity
Large funds face a problem due to their sheer size, as this means that they have to target larger companies to invest in. This is because only the large companies have the size and liquidity requirements which suit such funds.
A US$1 billion fund which wants to invest 1% of the fund (i.e. US$10 million) obviously cannot select a company with a market capitalisation of say US$50 million, as this would mean buying up 20% of the company. Because of this, funds are limited to large, familiar names which are extensively covered by sell-side brokers and thus may end up being expensive in terms of valuation. As a retail investor, we can invest in smaller companies which may offer good prospects and are trading more cheaply.
Thematic And Constrained
Finally, most funds are tagged to a specific theme or investment strategy and are thus constrained in their approach when it comes to buying good companies.
Some funds may be restricted to certain countries or regions, while others may have requirements whereby they cannot invest too much in one position or industry. These constraints would imply that the fund manager is unable to have a totally free reign when it comes to maximising performance, as he has to work within these guidelines. Retail investors, however, face no such constraints except those which they impose upon themselves.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.