In a statement to stakeholders yesterday, SQM Research senior investment analyst Leanne Truong said the issue of “fund capacity” is becoming increasingly relevant as the Australian superannuation pool and managed fund markets continue to grow.
“Investors should consider the level of funds under management (FUM) maintained by a fund and its strategy before making an investment decision,” Ms Truong said.
The property-focused analyst said that funds that are “too large” may be affected by two major impediments, including transaction cost – which arises when “the buying or selling of shares exceeds market liquidity” – and limitations in investment options, particularly more liquid small to mid-cap stocks.
“Because of liquidity issues and transaction cost, most managers will apply liquidity and market cap screens, limiting certain investments,” she said.
“Even if they are permitted to invest in small to mid-cap stocks, the positions held will generally be small. In markets where small to mid-cap stocks are undervalued and outperforming, funds that are excessively large may miss out on the alpha opportunity.”
