Such charges are there to deter investors from pumping more money into a vehicle that is reaching capacity, but it is still possible to get access to it if demand is strong enough.
Rob Morgan (pictured), analyst at Charles Stanley Direct, believes that only in very, very unusual circumstances should an investor pay a 4 or 5 per cent initial charge, as there are plenty of alternative options on offer.
"If it is a 2 or 3 per cent extra charge and you think the manager has a good chance of outperforming on a three- to five-year basis, then I can see some logic in it, but 5 per cent is a big hurdle," he said. "However, in pretty much every area I think there are enough alternatives out there for you to avoid the extra costs. Also, don’t forget that the fund that is soft-closed could re-open, meaning that you might end up paying extra for no reason."
However Rob Gleeson, head of FE Research, says he does not see a big problem if investors want to buy in to a fund that has initial charges – as long as they have a long-term time horizon.
"If you’re holding the fund for 10 or 20 years, it’s not going to make any difference," he said. "If you’re investing on the basis that you want to take your money out after one, two or even three years, that’s another story."
Bestinvest’s Jason Hollands agrees, but believes the chosen fund has to stand out from the crowd.
"It's a bit like buying an investment trust on a premium," he said. "It's a tough call, but if the fund is a leader in its field there is a case for it."
"Up until a few years ago everyone was happy to pay an initial charge – it was the norm," he added
With this in mind, FE Trustnet looks at some soft-closed portfolios that may be worth a look, even though investors may have to pay over the odds for them.
Aberdeen Emerging Markets
Gleeson points to a fund such as Aberdeen Emerging Markets as one that ticks the box, as it invests in such a long-term market. It recently introduced a 2 per cent charge on all money flowing in to the £3.8bn fund.
Most platforms have opted to keep the fund on their buy-lists, though some – including Cofunds – have removed it. Chelsea Financial’s Darius McDermott recently questioned Cofunds’ move, in a recent interview with FE Trustnet.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
Devan Kaloo and his team’s fund is the standout performer in the IMA Global Emerging Markets sector over the last decade, with returns of 471.14 per cent. Over the same period, its MSCI Emerging Markets benchmark index has returned 279.79 per cent.
Aberdeen Emerging Markets has also been less volatile and has a lower max drawdown over the 10 years – 33.27 per cent for the fund, versus 42.62 per cent for the index.
The team puts an emphasis on strong balance sheets and cash-flow above everything else, which helped it during the market sell-offs of 2008 and 2011.
The fund requires a minimum investment of £1,000 and has an ongoing charge figure (OCF) of 1.94 per cent.
First State Indian Subcontinent
Another long-term holding, the £232m First State Indian Subcontinent fund, upped its initial charge to 4 per cent in September 2011.
David Gait is one of only two FE Alpha Managers who run an Indian-focused fund in the IMA universe, and along with Aberdeen Global Indian Equity, is the only fund with five FE Crowns.
One look at its performance record and it is easy to see why: even though it has been a tough time for India recently, First State Indian Subcontinent has managed 13.06 per cent over three years. This compares with losses of more than 10 per cent from its MSCI India benchmark.
Its record is even better over the longer term. FE data shows that Gait’s fund has returned 112.41 per cent since its launch in November 2006, beating the index by more than 68 percentage points.
The second-best performing Indian fund over the period – Aberdeen Global Indian Equity – has returned 85.18 per cent.
Performance of fund vs index over launch
Source: FE Analytics
It is also number-one in its peer group over one, three and five years.
Over all of the time periods mentioned above, the First State fund has also been less volatile than its index, and protected against the severe losses sustained in 2008 and 2011 far more effectively.
It is run in a similar mould to the Aberdeen Emerging Markets fund mentioned previously. It is currently significantly overweight consumer products and industrials.
Health and beauty specialist Marico is its number-one holding, with a weighting of more than 8 per cent.
Gait has absolutely nothing in energy, which has helped it during the recent rough patch for commodities. He is currently sitting on around 7 per cent cash.
First State Indian Subcontinent requires a minimum investment of £1,000 and has an OCF of 1.96 per cent.
CF Odey Absolute Return
James Hanbury’s £636m fund is set to soft-close tomorrow, which it is doing by slapping an initial charge of 4 per cent on all new transactions.
While not in the mould of the average absolute return fund, it has dominated the sector in recent years, delivering the highest returns over one and three years.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The fund has also consistently beaten its FTSE All Share benchmark, although it has been more volatile – very unusual, given that the average absolute return fund priorities limiting downside risk.
Hanbury seeks to deliver an absolute return by using both long and short positions in the equity and bond markets. He is currently short government bonds, for example, but long banks and telecoms in the equity market.
FE Trustnet recently identified some possible replacements for the four crown-rated fund, but none have come close to matching it on a total return basis.
It requires a minimum investment of £1,000 and has an OCF of 1.45 per cent. The fund also charges a performance fee on top of that, meaning investors would have to pay yet another set of costs.
