Lots of Capital = Less Attractive Returns

Ultimately the best investment managers will tend to have between $1-50 Billion under management or less (with long term average results of at least 15% after fees and expenses). That is because as you get beyond managing an amount greater than $50 Billion you have serious limitations insofar as your "investment universe" is concerned. To illustrate, say capital under management is indeed $50 Billion.

Lets assume two different managers, (i) and (ii). (i) owns 100 different companies and (ii) owns only 20-both are fully invested. With no other limitations (i) would be limited to businesses available for $500 million and above and (ii) limited to $2.5 Billion and above. But this is unrealistic since almost every fund of has some restriction as to the amount of ownership which can be established in any single business. Therefore assume limits of 25% and 5% ownership.

Now (i) is limited to

@25%, 500 Million x 4 = $2 Billion
@ 5%, 500 Million x 20 = $10 Billion

And (ii) limited to:

@25%, 2.5 Billion x 4 = $10 Billion
@ 5%, 2.5 Billion x 20 = $50 Billion


According to Morningstar, Total universe = 8831 stocks:

Businesses with market capitalizations greater than or equal to:

Market Cap.................. number of businesses

$ 0.5 Billion.................... 2666
$ 2.0 Billion..................... 1429
$ 2.5 Billion .................... 1291
$ 3.0 Billion ...................... 1137
$ 5.0 Billion ........................ 827
$10.0 Billion .....................526
$20.0 Billion ........................322
$50.0 Billion ......................131

Oh but now for a bit of reality. Lets make this realistic and say I am interested in only those funds that provide investors with long-term attractive rates of return or at least better returns than offered by an index fund after fees and expenses. So lets assume 10% as a better than average return, which it is or isn't depending on the period of years. Let's do a simple case, those businesses that meet the foregoing Market Cap restrictions, and earned 10% return on equity for the previous year (which I actually consider very average). This will obviously overstate the realistic number were we to look at only those with moderate amounts of leverage and who earned a 10 year return on equity at or above 10% and not just for a single year. At any rate:

The number of companies, Market Cap & 10%+ Return on equity

Market Cap................... number of businesses

$ 0.5 Billion................. 1651
$ 2.5 Billion.................. 950
$10.0 Billion................. 436
$50.0 Billion.................. 116


This is a long winded way of making the point that as you get above $50 Billion of investment Capital you quickly become restricted as to where one might intelligibly allocate investment capital. Oh, the number of businesses above $50 billion and earn at least 20% return on Equity (single year) amount to only 71 businesses, not removing therefrom those that are very highly leveraged.


A very, very limited list of such really, really great Investment Funds: (No Order)

Fund name, (State) Primary Manager

Fairholme (recently moved to Miami from NY) Bruce Berkowitz
Baupost Group (Boston) Seth Klarman
First Manhattan Consulting Group (NY) Sandy Gottesman
Gotham Capital (NY) Joel Greenblatt
Weiss Asset Management (Boston) Andrew Weiss
Tweedy Browne (New York) Christopher Browne
Chieftain Capital (NY) Glenn Greenburg
Longleaf Partners (Tennessee) Mason Hawkins
Semper Vic, under Gardner Russo & Gardner (PA) Tom Russo
Markel-Asset Management (Virginia) Thomas Gayner
H.L. Lichstrahl & Company (Virginia) Howard Lichstrahl