Fund houses are failing investors by not giving limits to how big they will let their funds grow, according to industry experts.
It is generally accepted that many funds – especially those in sectors where liquidity is more of a concern – can reach a size that starts to harm its freedom to maintain performance.
However, fund houses are under no obligation to communicate to investors whether or not they will limit the funds they will accept or what size would be too big.
Andy Parsons, head of investment research at the Share Centre, says this needs to change.
“There needs to be an understanding from the outset how big a fund can reasonably get,” he said.
“Some funds do come out and say it can only take a maximum amount of capital. Letting a small or mid cap fund grow too large does end up creating tails of portfolios and can restrict the manager where he can invest, particularly if they are down the lower cap end of the scale.”
Kerry Nelson (pictured
), managing director of Nexus IFA, said: “I have been saying for years that fund houses should look at this.”
“It depends on the type of fund whether it’s relevant and the market it operates in in terms of scalability, so some of the funds won’t suffer as much. The large cap funds might not have so many problems, but certainly for small or mid cap funds it could be a real problem.”
Another issue is the lack of a common definition for soft-closure. Aberdeen recently ‘soft-closed’ its Aberdeen Emerging Markets
fund, although the fund remains available for directly for a minimum investment of £500.
Aberdeen considered the fund to be soft-closed when they stopped marketing it, although other fund houses use different definitions.
Parsons said: “One way of slowing inflows is through introducing an initial charge, and that can be very effective.”
“The investor then has to really consider whether paying the on-going management charge and the dealing costs and the initial charge is really worth it, when it becomes clear you will need a significant amount of growth to get back to the starting position.”
, the subject of a series of FE Trustnet
research articles yesterday, always agrees a limit for a fund before it is launched, and soft-closure takes the form of a high initial charge.
Philip Lund, investment communications manager at the firm, commented: “Fund size and its effect upon performance is something we keep a close eye on. All of our fund strategies have an agreed capacity.”
“Every time we launch a fund – going back to our first OEIC fund in 2001 – we pre-determine, in agreement with the fund manager, the maximum amount of money that he or she is prepared to run in that fund.”
“This helps to guard against any liquidity issues, ensuring the manager the conditions in which they can deliver and sustain long-term outperformance.”
JO Hambro has recently stopped marketing its UK Opportunities and UK Equity Income portfolios. Lund says the firm don't see these funds as soft-closed, but did admit it is reviewing capacity issues.
Nelson says that the widespread failure to give similar defined limits and warnings is harming the relationship between fund houses and their clients.
She said: “I don’t think it is a regulatory issue, but I think it’s more of a positive way to communicate with clients, whether or not they are IFAs or the end user the investor.”
“Hambro have always made it clear from the start. The problem is with the fund houses that do not tell you they are going to soft-close and then they suddenly do that are the problem.”
“If things are communicated well then the relationship is much better.”
Nelson likes both the £504m JOHCM Continental European
and £177m JOHCM Japan funds, and says size isn’t an issue for either of them.
She said: “They are good funds and they are well-known but they are not taking more money from us at the moment because they are in niche areas that are not popular.”
Data from FE Analytics
shows that the European fund has made 191.12 per cent over the past 10 years, while its IMA Europe ex. UK sector has made 125.91 per cent.
Performance of JOHCM Continental European over 10yrs
Source: FE Analytics
Parsons points out that the problem of whether or not to soft-close a fund only comes to those that are already successful, and turning away new money is not easy.
“It’s a self-fulfilling prophecy that when a manager is successful more money will flow to that manager, and so success can bring its own headache, although it’s a nice headache to have,” he finished.