There have been a number of high-profile fund soft-closures in recent months, begging the question why others that are larger in size have not also looked to stem inflows to protect existing investors. This month, Fidelity announced the soft-closure of FE Alpha Manager Alex Wright’s Fidelity UK Smaller Companies fund at £248m.
There are a number of UK small cap funds that are much larger than this, including Harry Nimmo's Standard Life UK Smaller Companies, which only closed to new investors back in 2011 when it reached £1.3bn.
However, Morgan says investors cannot simply take a fund’s size at face value; instead, he says that managers with a low turnover, who trade relatively infrequently, are likely to handle inflows better than those who look to take advantage of short-term movements in the markets.
He points to FE Alpha Manager Julie Dean’s Cazenove UK Opportunities fund as a good example. The five crown-rated fund has grown from £83m to £1.3bn in the last two years alone.
"It’s the managers with a low turnover who can handle the bigger inflows," said Morgan.
"If you’re constantly trading in and are trying to find relative value then the manager could struggle to deliver the kind of performance they’ve done in the past."
"I’d be interested to see how Julie Dean from Cazenoze handles the size of the fund, for example. She’s really active in her trading, going in and out of whole sectors quite regularly."
"Her turnover has been very high and this has worked very well, but you do have to wonder if this is repeatable when the fund gets bigger."
The numbers Dean has produced over the years have certainly merited investors’ attention.
She began running the five crown-rated Cazenove UK Opportunities fund in December 2002. Since then it is the seventh-best performing fund in the IMA UK All Companies sector, with returns of 263.8 per cent.
It has considerably outperformed its benchmark – the FTSE All Share – under Dean, returning over 100 percentage points more than the index.
Performance of fund vs sector and index since Dec 2002
Source: FE Analytics
Cazenove UK Opportunities has maintained this high level of performance over the short- and medium-term as well, boasting top-quartile returns over one, three and five years.
A spokesperson from Cazenove says that while capacity is something the firm keeps an eye on, there are no plans to soft-close the fund in the immediate future.
"There is no official size limit, but it’s something we monitor regularly, as we do with our whole fund range," the spokesperson said.
"The fund has performed exceptionally well with careful capacity management allowing strong asset growth. The plan is to continue in that vein, until we feel there is an issue."
Dean recently told FE Trustnet that investors should only be concerned about a high turnover rate if the fund is underperforming, and that a low turnover is a sign they have run out of ideas.
Standard Life’s Thomas Moore said something similar in an interview last year.
Morgan points to Harry Nimmo as an example of a manager who is less affected by size, because he "runs his winners".
Nimmo’s Standard Life UK Smaller Companies fund is more than £1bn in size, which is very large for a portfolio of this kind. However, Morgan says his style allows him to run more money than most in the sector.
Fidelity’s Alex Wright is an example of a manager with a much higher turnover. FE Trustnet reported earlier this month that he had soft-closed his sector-leading Fidelity UK Smaller Companies fund at £250m.
FE Alpha Manager Nimmo says he was surprised by Wright’s decision to close it at this level, but points to the fact that different styles have different capacities.
"I don’t know what his turnover is like – if not very high, I would expect it to be quite high," said Nimmo.
"There is no doubt about it – if you are running a smaller companies fund you do not want it to grow in to a large portfolio. When my fund got to £1.3bn I felt it was quite big and so we closed it. Now at £1.1bn I am much happier and more comfortable."
Like Cazenove UK Opps, Fidelity UK Smaller Companies' track record has also warranted the huge inflows.
It is the best-performing fund in the IMA UK Smaller Companies sector over five years, with returns of 180.1 per cent.
Although Nimmo’s fund is a top-quartile performer over this time, it has returned 100 percentage points less than Wright’s portfolio.
Performance of funds vs sector over 5yrs
Source: FE Analytics
However, Standard Life UK Smaller Companies has been considerably less volatile than both the sector and Fidelity UK Smaller Companies over five years.
Nimmo’s "buy and hold" strategy has clearly worked over the long-term. Standard Life UK Smaller Companies has been the fifth-best performing fund in the sector over 10 years, with returns of 414.97 per cent.
Wright’s fund was only launched in February 2008, so it does not have as long a track record.
A spokesperson for Fidelity told FE Trustnet that the UK Smaller Companies fund was closed in order to keep Wright’s flexible investment strategy, but made no mention of whether his high trading-volume approach would have been in danger if the fund grew any larger.
Fidelity UK Smaller Companies’ annual turnover for last year – as at 31 Dec 2012 – was 66 per cent. Stocks in his portfolio have an average holding period of 18 months.
By contrast, Nimmo’s fund has an annual turnover rate of 13 per cent, with an average holding period of five years.
Nimmo has told FE Trustnet on numerous occasions that he is able to run a £1bn-plus small cap portfolio because his long-term approach means liquidity is less of an issue.
"Unlike some of my competitors who trade constantly and look for the best value, I am determined to buy and hold the very best companies. In that respect, the fund being so big isn’t a problem," he said in an interview back in March 2011 – before the fund was soft-closed.