What is the simple explanation for how more money in a fund could negatively affect performance? Why wouldn't the growth rate be the same whether the fund had 10 million or 10 billion in there?
Lets say I'm the smartest manager in the world. I want to buy Tesla. I think it will go up 50%. If I put 10 million into Tesla I barely move the stock price, and when it goes up 50% I can cash out and make a killing.
The current value is 34 billion. If I put 10 billion into Tesla I just increased its value by 29.4%!!!! I'll also own 22.7% of the company(10/44 billion).
If it goes up by 50% that isn't a 50% gain for me because I pushed the price up 29.4%. From where I bought it, 44 billion, to where I sold it, 51 billion, is only a 15.9% gain. Oh wait, when I sell my 22.7% ownership I'm going to force the stock price down so I'll be lucky if I even get a 5% gain. The stock wouldn't work exactly like that but I hope this helps it make sense.
The other option for a manager is to try to find other stocks. Instead of putting so much in Tesla I could also buy Facebook. I don't think it will go up 50%, only 30%, so I'm giving up some return there. If I continue this thought process forever I eventually end up owning hundreds of stocks that are probably mediocre in my eye. Eventually it will own most of, if not all, of the holdings in its benchmark. Here is an example, the Growth Fund of America, once a fund that did pretty well compared to its benchmark, now owns about 250 stocks. It is a large cap stock fund, Vanguard's large cap growth index fund has 330 stocks. The Growth fund of America owns most of its index. In the industry this is called a closet index fund. It owns most of the index, but because of its higher fees it will almost always underperform its index. Growth fund of America has underperformed the Vanguard Growth index fund over 1, 3, 5, and 10 year time frames.
See, more money managed makes it harder for a manager to knock it out of the park because anytime they buy a stock they are moving that stock a lot.