Now more than ever, many of the biggest, safest and fastest growing yields come in small packages. We hold four relatively small capitalization, high dividend companies in the Lifelong Income Portfolio. Expect to see more featured in coming months.
Blackstone Group LP’s (NYSE: BX) announcement this month that it will replace some human analysts with computers is a move toward the superior economics of scale of giant exchange traded funds, managed by computers following algorithms. Computer managers synthesize information and make decisions far faster than humans. And using them economically depends on scale, mainly having a large enough pool of capital to invest.
Increased scale does have a cost, however. Mainly, and regardless of the vehicle, big pools of capital require larger investments to have a meaningful impact on performance than smaller pools.
If a $100 million fund buys $10 million of a particular stock, for example, it’s taking a fairly aggressive position that could produce big gains or sizable losses. But that same $10 million investment could double or even go to zero without having a significant impact on a $10 billion fund.
What’s a make-or-break investment for the smaller fund is basically a waste of time and resources for the larger one.
Big funds get around that math by taking positions in proportion to their size. And here’s where the limits come in: The bigger they grow, the fewer stocks they can enter and leave without moving prices in a material way.