With a remarkable equity rally behind us, asset
bloat is a concern to keep in mind. Although U.S.
stock fund flows have been fairly modest overall,
some funds have been awash in new money. Which
funds face the biggest challenges?
To answer that question, I have dusted off the bloat
ratio—a measure I introduced after the great rally
in the
1990
s. The bloat ratio tries to find out how
much a fund has to trade and how liquid its holdings
are. Put it together and you have the bloat ratio.
It multiplies turnover by the average day’s trading
volume of a fund’s holdings (asset-weighted). We
limited it to U.S. stocks, which in turn limited us to
U.S. stock funds.
Thus, a fund with a
100%
turnover ratio that owns an
average of three days’ trading volume figures to be
more bloated than one with
10%
turnover and stocks
averaging three days’ trading volume. The trading
volume figure is calculated using the amount of shares
that trade on a typical day for a stock. So, if stock A
trades
1
million shares a day but a fund owns
2
million
shares, then we know it owns
2
days’ trading volume.
In reality it would take many more than two days to
trade the stock because placing a massive order out
there all at once would move the stock in the wrong
direction for the fund.
A Secondary Factor
Bloat is worth factoring in, but don’t let it drive the
decision you make on a mutual fund. Expense ratios,
the record under the current manager, manager
investment, and stewardship of the parent company
are all more important determinants of a fund’s
success. Having too much money to run can be a
handicap, but it’s rarely devastating to a fund.
You’ll see some successful funds at the top of the
bloat ratio list.
How I Tested the Bloat Ratio
As you know, I like to gather data at the beginning of
the time period and test how it did over the ensuing
time period so I can simulate what an investor could
have done in the real world. If you use data today
and then look back, you can easily confuse cause and
effect. For bloat ratio, I checked pre-expense ratio
returns because I don’t want something that’s simply
an indirect way of capturing fees.
I tested the bloat ratio’s predictive power for
2002
–
07
returns and
2007
–
12
returns. I grouped funds into
five groups based on their bloat ratios relative to their
peer group. Besides returns I looked at success rate—
which measures what percentage of funds survived
and outperformed peers. It’s a way of incorporating
funds that no longer exist. Because many failures
get killed off, they can distort the results of these
sorts of tests.
Some Predictive Power
The results for bloat ratio were mixed. It worked well
for the
2007
–
12
period but was no help in
2002
–
07
.
For the
2002
–
07
test, the lowest-bloat quintile had a
43%
success rate compared with rates ranging from
How Bloated Is Your Fund?
Fund Reports
4
LKCM Equity Institutional
Loomis Sayles Bond
Oakmark Global Select
T. Rowe Price Growth Stock
Morningstar Research
8
Announcing Our Managers
of the Year
The Contrarian
10
Dialing Down Your Risk
Red Flags
11
Watch Out for These
Hot Performers
Market Overview
12
Leaders & Laggards
13
Manager Changes and News
14
Portfolio Matters
16
Safeguard Your Bond Portfolio
Tracking Morningstar
18
Analyst Ratings
Income Strategist
20
FundInvestor 500
22
FundInvestor 500 Spotlight
23
Follow Russ on Twitter
@RussKinnel
RusselKinnel,
Director of FundResearch and Editor
FundInvestor
February 2014
Vol. 22 No. 6
Research and recommendatio s for the s riou fund investo
SM
Continued on Page 2
