Is there still money to be made in Large Cap?

That is the underlying question to me that I am asking as I start to consider some fund choices with friends who are working through the agonizing process of picking new mutual funds and changing brokerage houses. A recent column on MSN Money rated the various mutual funds and put American Funds various offerings in the list over and over and over again. This rating was simply from the standpoint of assets under management for the various fund. It did not, strictly speaking, order them for gains and returns.

Large Cap Mutual Funds A Go-Go

Interestingly, it seems that many of these funds were also managed by Fidelity. Fidelity Magellan, a once go-go mutual fund of which everyone and their brother wanted to get their grubby little hands around some shares, was honestly one of the most dissappointing of the funds listed, in terms of returns year to date and over a 5 year period.

All of the funds listed were large-cap mutual funds. The crux of the article, as you approached the bottom, was that there were various other mutual funds that operated in the large-cap space that had done much better. One example was up as much as 60% year to date, if memory serves. So why bother going with the big stocks?

Large Cap is usually discussed in terms of how much money is invested. The term cap is an abbreviation of capitalization—the amount of money in the market in terms of values of shares. Largely capitalized companies have millions and millions of shares outstanding and the shares typically have a decent value. These aren’t penny stocks, and the vast majority of them trade over 10 dollars.

Practical Advice

But size does matter when evaluating investments. Getting back to my friends who are looking for help in evaluating stocks, my advice now is somewhat simplified. Pick something for at least part of your portfolio that has at least some aspect of small to it. I don’t really care if it is a fund that invests in large-cap equities, what I do care about in that case, is that the fund itself not be large cap. If 5 million people own 100 shares of the fund, there is just too much money in there for the fund manager to be nimble and move around. Moves that the fund might want to make will themselves impact the price too much of the fund’s share price so that it is a problem when it comes down to actually understanding the market and how to make money there. And that is what it’s all about isn’t it? Making money?

Finding an Upper Bound

Jim Cramer also alluded to this issue in his book “Real Money”. When discussing his heyday as a manager of a hedge fund, he discussed the difficulty of managing larger and larger sums of money. It is an upper bound that anyone trying to make money over a shorter period of time is going to have to deal with. And for me, if it is for people I know, a 20, 30 year time horizon is just too long. A year or two maybe, but not 20 years.

So, when looking for a fund, figure out not just what it invests in, but how much money it is managing compared to its peers. If it is alot of money, it is highly unlikely that this fund can maneuver quickly when the market moves. And that might be what costs you a few percent over the next year.