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How small is too small?

Funds and investment trusts: how small is too small?

by Kyle Caldwell from interactive investor | 10th February 2021 10:59

There are thousands of funds and around 400 investment trusts for investors to pick from – is there ever an argument for going against the crowd and investing in the tiddlers?…

Small can be a virtue

Smaller funds are nimbler and more flexible than large funds with billions of pounds of assets under management. This is because the pool of stocks that big funds can invest in shrinks the bigger it becomes. Dealing with large sums means a fund manager can only invest in the largest and most liquid shares. But smaller funds are not constrained by size and are able to move in and out of shares quicker…

Some small funds are overlooked due to being managed by boutique asset management firms. These firms spend little or nothing on advertising and instead let their performance do the talking. Boutique fund management groups usually stick to one area – emerging markets or smaller companies, for example – rather than attempting to be a jack of all trades across various asset classes and sectors…

But some funds and trusts are small for a reason…

Some funds and trusts are subscale due to performance failing to stand out from the crowd, which has led to low investor demand.

A fund with a small amount of assets that has been around for several years and is run by a big asset management company should set the alarm bells ringing. This is a sign the fund has struggled to get on the radar of investors and may be a persistently weak performer. Or perhaps a once-big fund has suffered a notable period of underperformance, which has led to investors throwing in the towel…

James Carthew, head of research at QuotedData, notes: “Small trusts find it harder to grow – it is one of those Catch-22 situations where small trusts just don’t have the budgets to promote themselves and so, if they are trading at a discount, this may become entrenched.”

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