The closing of Fidelity's Magellan Fund to new shareholders dramatically underscores how bigness in mutual funds can present a hurdle to profits.
"The larger a fund becomes, the more difficult it becomes for a fund to produce substantial returns on investment," says John Bogle Jr., managing director of Numeric Investors, which runs several small funds from Cambridge, Mass.
Yet some evidence suggests that, even while hindered by their own size, behemoth funds do well for investors - perhaps because of the talented managers at the helm.
Last week, Fidelity Investment rocked the investment industry with news that after Sept. 30, its flagship Magellan Fund would close to new investors.
Existing investors, including those in 401(k) or other group retirement plans, may still contribute new money to the fund. The 401(k) contributions make up about 80 percent of the fund's inflows.
Fidelity argues that limiting inflows will bolster returns for Magellan manager Robert Stanksy and his team. The decision is also expected to stanch future redemptions from the fund, as it grows at a more orderly pace.
Critics argue that Magellan, at nearly $63 billion in assets, is too large to make the type of rapid-fires moves required for top performance.
Consider: When Mr. Stansky identifies a stock he sees as attractive, he will buy into it over the course of days or weeks to avoid driving the share price up. But by the time he's finished buying, others may have also noticed the bargain, and his buying activity, and the share price may have risen substantially.
This phenomenon, known as "trading costs," also pushes the mega-funds to invest mainly in large-company stocks that are big enough to absorb the cash.
Still, bigness is not necessarily badness, says Jack Bowers, editor of Fidelity Monitor, a fund report in Rocklin, Calif.