Turner Investment Partners, in new white paper, says that the bigger a stock portfolio gets, the more performance suffers. Turner recommends that closing a portfolio when the limits are reached will preserve the return potential.

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The bigger the stock portfolio, the greater the chance that investment performance will suffer, according to the latest position paper by Turner Investment Partners. And by setting asset limits and subsequently closing a portfolio when the limits are reached, money managers may help preserve the portfolio’s return potential and act in the best interest of clients.

Turner, an investment firm based in Berwyn, Pennsylvania, publishes quarterly position papers commenting on industry issues.

Written by David Kovacs, senior portfolio manager/security analyst, and Bob Turner, chairman and chief investment officer, the paper, entitled For stock portfolios, smaller is often better, points to research documenting the “size effect” – the inverse relationship between the size of assets under management and the ability to generate strong returns. Once assets reach a certain mass, investment performance tends to worsen, especially in small- and mid-cap portfolios.

Large asset bases can contribute to the deterioration of returns in two ways:

One, they can reduce the investment manager’s ability to trade efficiently – the bigger the portfolio, the longer it takes to build or eliminate positions in stocks, which can adversely affect the price.

Two, they can limit the number of stocks eligible for investment – only select stocks with larger market capitalizations may be sufficiently liquid (trade enough shares daily so that their price won’t be adversely affected when bought or sold) to be included in ballooning portfolios.

Turner early on set asset limits for its institutional portfolios and mutual funds, the paper noted. It concludes that stock portfolios that “do right by their clients and close to new investors when their assets reach a certain predetermined size” may have the best chance of sustaining superior returns.  

Edited by: Erin Kello


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