What’s the advantage of being small?
For small investors, it’s a lot. They have less bureaucracy and office politics to deal with, they can just focus on investing and client service. And they have a much bigger universe of stocks to pick from. Small, illiquid issuers of stocks or bonds can’t be purchased by big institutional funds in adequate size to make a meaningful difference in performance. If the big boys can’t buy a stock, they’re not going to spend time researching it.
That means there are many unexplored investment gems out there for smaller investors to explore. If big institutions aren’t buying the shares, brokerage analysts aren’t going to spend time on them, either. That’s why a lot more analysts follow Kraft Foods than Crumbs Bake Shop.
It used to be that being big was an advantage in other ways. You could get company management to pay attention and talk to you; you could afford sophisticated software to make sure your trades settled properly and to present your performance in the best light; and you could hire a host of analysts dedicated to crunching numbers and creating spreadsheets that tracked fundamental financial performance.
But the internet and networking have changed all that. SEC regulations and the ease of webcasting make it simple for anyone to listen live as the most obscure CFO discusses her quarterly cash-flow. And trade performance data that used to cost millions to develop and run can now be leased on a mobile platform for a few thousand dollars a year.
So expect that successful portfolio managers will continue to leave the big firms and set up shop on their own. Increasingly, a large asset size is a handicap for both managers and investors, rather than an advantage.