Danoff @ Contra

[cdxx]

that probably has as much if not more to do with its management.

[FatOtt]

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The disadvantage of a large fund is having to do bookkeeping for 1000 stocks instead of 100. there are advantages to a large fund as opposed to a small fund as well. such as not having to sell off assets, sustaining greater variance, etc.

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Do you really think the administrative costs per dollar under management is greater for large firms? That's ridiculous. You're also incorrect about selling off assets - why wouldn't a large firm have to sell off assets to satisfy shareholders redemptions the same way that smaller funds do?

I don't think DesertCat is misunderstanding anything about this.

[cdxx]

more positions means more market orders, more research, more people employed, as well as it is harder to find 1000 bargains than 100.

larger and growing funds usually enjoy a net inflow of money, rather than outflow, which means a big withdrawal does not present the challenge of rebalancing your positions.

[FatOtt]

Let me get this straight, you think the administrative costs as a percentage of assets under management are greater for larger funds than smaller funds? That seems a fairly stupid assumption.

Also, when you say this:
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as well as it is harder to find 1000 bargains than 100.

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You're more or less agreeing with the idea that it's harder to beat the market when you're running a large fund.

[cdxx]

here's the summary of my position.

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yes, it's harder to manage $100B than $100M. that's not news.

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This theory that a large fund can only be a mediocre fund is still in vogue today, and it's just as misguided as it was a decade ago.

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[DesertCat]

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"Magellan became a $10 billion fund in May 1987. This announcement provided more grist for the naysayers who predicted it was too big to beat the market. I can't quantify the contribution that skeptics made to my perfomance, but I don't doubt it was substantial. They said a billion was too big, then 2 billion, 4, 6, 8, and 10 billion, and all along I was determined to prove them wrong." (ed: which he did)

"Beating the Street", chapter 6, page 130.


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Peter Lynch made his mark managing a portfolio that was very tiny at first, medium sized for a long time ($1B isn't large) and didn't become outsize large until the end of his run. When he wrote those words, he had almost no experience running an outsize fund. So how would he know what was possible other than to have the uber confidence of a guy who'd killed the indexes for over a decade with a medium small fund?

And Peter Lynch retired less than 3 years later. He had stopped beating the market from the moment he wrote those words (actually a year before). Looks like he eventually proved the naysayers right.

This isn't my idea, I'm just referencing Warren Buffett, whose record of beating the market is something like 48 years out of 50. And who has managed a large portfolio for many years longer than Peter Lynch did. So why don't you tell me why Buffett is wrong about size being the enemy of investment returns?

[cdxx]

i don't want to look up historical data and i'll take your word for it that Magellan did worse than the market since 1987. my post did not take anything away from buffet's experience or his track record. i quoted and defended two paragraphs in a book because i share that opinion: it is not a fact that contra will fail from this point on based on its size alone. it seems that berkshire is an example that actually supports this.

[DesertCat]

Actually, Magellan has done worse since Lynch left, I think the first manager did okay, but it's trailed over the last ten years. And I'm not saying it's a fact that contra will fail, just that you should be concerned when a manager you love starts managing ever more money. His job just got tougher. Berkshire still beats the market, partially because of the strong performance of it's subsidaries. But it's certainly no longer killing the indexes like buffett used to.