Excerpted from Common Sense on Mutual Funds by John C. Bogle, pages 99-100

Funds can get too big for their britches. It is as simple as that. Avoid large fund organizations that (1) have no history of closing funds - that is, terminating the offering of their shares - to new investors, or (2) seem willing to let their funds grow, irrespective of their investment goals, to seemingly infinite size, beyond their power to differentiate their investment results from the crowd.

Just what constitutes too big is a complex issue. It relates to fund style, management philosophy, and portfolio strategy. A few examples: a fund investing primarily in large-cap stocks can surely be managed successfully - if not for truly exceptional returns - even at the $20 billion or $30 billion (or higher) level. (None of today's funds of that size has outpaced the Standard & Poor's 500 Index over the past five years.) For a fund investing aggressively in tiny microcap stocks (usually market capitalizations of less than $250 million), $300 million of assets might be too large.

YAHOO! FINANCE TIP Yahoo! Finance reports a mutual fund's total net assets on its profile page. For an example, see VFINX's profile page.

Often, checking the fund's quartile rankings over time (mentioned in Rule 4) will reveal whether growing size has had an impact on relative return. Figure 4.5 shows the performance pattern of a once-popular midcap growth fund whose record deteriorated severely as it grew. In 1991-1995, it earned top-quartile ratings in four of the five years, and its assets grew from a tiny $12 million to the $1 billion range. But the three years since its assets moved to $2 billion, and then to $6 billion, were spent in the bottom quartile. Its failed momentum strategy (buying stocks with powerful earnings thrust) may have accounted for part of the deterioration, but the clear message is that size has impeded return. It is not a positive message for investors considering the fund today.


Optimal fund size depends on many factors. A broad-based market index fund, for example, should be able to grow without size limits. A giant fund with very low portfolio turnover and relatively stable cash inflows from investors can be managed more easily than one with aggressive investment policies and volatile cash flows - in and out - that not only reflect, but are magnified by, its short-term performance. A multimanager fund - especially if it uses managers who are unaffiliated with one another - can be successful at larger asset levels than a fund supervised by a single management organization. But do not underestimate the challenge a fund faces in selecting two or three, or even four, truly excellent managers. There are no easy answers.

Size - present and potential - is a highly important concern. Excessive size can, and probably will, kill any possibility of investment excellence. The record is clear that, for the overwhelming majority of funds, the best years come when they are small. Small was beautiful, but nothing fails like success. When these funds caught the public fancy - or, more likely, were vigorously hawked to a public that was unaware of its potential exposure to the problems of size - their best years were behind them. As I'll explain in Chapter 12, unbridled asset growth in a fund should be a warning flag to intelligent investors.