With each passing month>, Pimco Total Return breaks another record for being the largest mutual fund ever. It recently had nearly $250 billion in assets and $100 billion more than the No. 2 fund, American Funds Growth Fund of America . But impressive as it sounds, reaching the top of the mutual fund mountain isn t always good news.
From 2000 to 2006, more than one-quarter of the funds that began a year as one of the nation s five largest funds had lost money three years later. Even among the ones that made money, their performance was often eclipsed by smaller funds in the same category, according to data from Morningstar. Among the five biggest funds this year, three have lost money, and a fourth is flat.
Analysts say one problem is that big mutual funds can find it hard to be nimble. They often have to take a pass on attractive smaller investments because they can t buy enough of them to make any meaningful impact in the fund. When the big fund does make a move, it has to buy or sell hundreds of millions of dollars worth of an investment, often forcing the fund to buy at a higher price or sell at a lower price, either of which hurts investors.
Perhaps the poster child for a big fund that stopped growing is Fidelity s Magellan. At the end of 2000, it was the nation s largest fund, with $93 billion in assets. Over the next three years, the fund lost, on average, 5.6 percent a year. Today Magellan has $20.2 billion in assets and is down 9.5 percent so far this year. Fidelity spokesperson Vincent Loporchio says the firm has confidence in Harry Lange, Magellan s manager since 2005.
Pimco has bucked the trend so far. The bondcentric Total Return has gained about 7 percent this year; a good performance in a dicey investing climate, although a quarter of its competitors have beaten it this year, according to Morningstar. Pimco didn t make any executives available for comment. For investors, analysts say, the historic return of the top dogs is a reminder that biggest doesn t necessarily mean best. When looking at funds, put more emphasis on how much a fund costs than on its size, says Russel Kinnel, Morningstar s director of fund research.
|Fund||YTD Fund |
|Rank in |
|Data as of 8/31/10.|
|Pimco Total Return||7.4||26|
|American Funds Growth Fund of America||-2.3||55|
|American Funds EuroPacific Growth||-3.3||40|
|American Funds Capital World Growth & Income||-3.6||76|
|American Funds Capital Income Builder||0.0||56|