https://www.nasdaq.com/articles/can-mutual-funds-own-stocks-under-5-2017-11-06

What about institutional investors?

Mutual funds and other institutional investors may choose to avoid stocks priced at less than $5 per share, but there are no specific rules or laws prohibiting the practice.

In fact, one of the largest actively managed stock funds on the market today is the Fidelity Low-Priced Stock Fund (NASDAQMUTFUND: FLPSX) , which specifically seeks to invest in stocks priced at less than $35 per share. It launched in 1989 at the height of the public's love affair with low-priced stocks, and has crushed the market since inception. (Its focus on low-priced stocks may be more of a guide than a rule today, since its five largest investments all trade for more than $35 per share, a testament to the fact that self-imposed restrictions are rarely set in stone.)

Of course, index funds are more prominent today than in the past, and many have a mandate to own all stocks in the index they track, regardless of share prices. The S&P 500Index , and the funds that track it, all have at least one penny stock in their portfolio, Chesapeake Energy . The Russell 2000 Index , which is generally regarded as the small cap stock index, includes 157 penny stocks, based on my analysis of the iShares Russell 2000 ETF .

Realistically, penny stocks don't make up a large part of the market in terms of value, but they are numerous, and many are owned by funds because share prices are largely irrelevant to the decision to buy or sell. Professional investors know that a stock that trades for $4 that they believe to be worth $10 is a far better investment than a $40 stock they believe to be worth $50.