The manager says he is taking this action to ensure he can still gain access to sub-£25m companies, which he believes are where the best opportunities lie. "What’s happened is we have started saying to new customers that we will soon stem inflows as we need to prioritise our existing investors for capacity reasons," he said.
"As you may know, the fund has a big weighting to small and micro cap stocks. If we are going to retain that bias, then we are going to be restricted if the assets grow much larger."
"We have said that at around £550m to £600m we would start planning [for the soft-closure]."
"Effectively, the open-ended fund is £270m and the investment trust, which is the same strategy, is £250m; so we are not far off. We are beginning to plan as we can’t take in too much more," he added.
The CF Miton UK Multi Cap Income fund and others like it have become popular recently as investors look for equity income funds that do something a bit different to their mainstream rivals.
As well as providing a diversified source of income and a fairly healthy 4 per cent yield, Williams’ fund has performed strongly since its launch in October 2011.
According to FE Analytics, it has returned 69.13 per cent over that time, making it the fourth best performer in the IMA UK Equity Income sector.
Performance of fund vs sector since launch
Source: FE Analytics
The fund’s soft-closure could well be a source of frustration for investors.
However, Williams says that the issue of capacity is vital when it comes to multi-cap income funds. For instance, he says that he is willing to take a 15 per cent stake in smaller businesses with a market cap of £25m, which equates to £4m worth of stock.
The manager says that if the fund were to grow past that £600m threshold, he would be unable to follow the same strategy, which he feels would be detrimental to his portfolio’s performance.
"It would really constrain us. If you are happy to hold £50m companies then that’s fine, but I feel that the best opportunities are in the £25m range," he explained.
Other funds with a similar mid and small cap focus are having to grapple with the same problem after strong inflows this year.
FE Alpha Manager John McClure’s Unicorn UK Income started 2013 at £84m and at the last count it was £440m. McClure himself admitted that he now has to look further up the market cap spectrum and leave the smallest constituents of the index alone because of the heavy inflows he has received.
"Our smallest holding is Dillistone, as it has a market cap of just £15m. I don’t think we will be able to replicate that and we will have to start moving slightly up from that sort of size," McClure explained.
There aren’t many funds out there that focus on the lower end of the market cap for their dividends, and many of those that do are having to change to cope with an increase in their size.
The likes of Majedie UK Income, Standard Life UK Equity Income Unconstrained, Ardevora UK Income and Royal London UK Equity Income tend to avoid the mega stocks and instead have high weightings to mid caps, but many large cap funds have been investing there too in recent years because the FTSE 250 has done so well.
There are not many with a high weighting to the lower end of the market, but Williams expects that to change.
"Capacity is going to be the main issue. There will be a lot of funds issued in this area to meet the demand," Williams said.
"For every one fund that closes, there will probably be three new ones. Our investors will be the prime beneficiaries as they got in early and the other funds that come into this space will just be driving up the share price," he added.
However, what can new investors do in the meantime?
The first option would be to buy shares in the Diverse Income Trust trust, which as Williams explained earlier, is the mirror image of his OEIC. His trust and fund have had similarly high returns recently.
Performance of fund and trust vs index year-to-date
Source: FE Analytics
The trust has a lower yield than his open-ended fund, however, paying out just 2.27 per cent, which is roughly 270 basis points lower than the UK Multi Cap Income fund.
On top of that, and like most trusts that offer a degree of yield, investors who want access to Diverse Income now have to pay a 3.37 per cent premium to NAV.
For anyone looking for an alternative to Williams' fund, Siddarth Chand-Lall’s Marlborough Multi Cap Income portfolio is one option.
The manager holds roughly a quarter of his fund in micro caps – though he describes a micro cap as a sub-£250m market cap stock. It too was launched in 2011 and has performed strongly.
Over one year, for instance, the fund is the fourth-best performing portfolio in the IMA UK Equity Income sector this year, with returns of 40.46 per cent.
Performance of fund vs sector year to date
Source: FE Analytics
However, the fund is currently £503.7m in size and therefore could itself have problems with capacity in the not so distant future.
Ben Willis, head of research at Whitechurch, has used the Miton fund since it was launched and says because of its imminent soft-closure, he may turn to the five crown-rated Chelverton UK Equity Income fund as a replacement.
It is a different type of fund to Williams’, but it does have 44.2 per cent of its assets in sub-£250m companies.
Although Chelverton UK Equity Income struggled in the build-up to the financial crash, it has since rebounded strongly and has been one of the top performing funds in the sector ever since.
Performance of fund vs sector and index
| Name | 1yr | 3yr | 5yr |
|---|---|---|---|
| PFS - Chelverton UK Equity Income | 44.1 | 74.24 | 196.45 |
| FTSE All Share | 20.94 | 31.4 | 100.02 |
| IMA UK Equity Income | 24.93 | 39 | 94.18 |
Source: FE Analytics
The fund has a yield of 4.12 per cent and an OCF of 1.84 per cent.
Although he is considering buying it, Willis says he will have to move quickly if he wants to use it in his model portfolios.
"For us to find an attractive alternative to the Miton fund, well we just can’t do it. We will probably look at the Chelverton fund, but it is probably going to do a Unicorn UK Income [and grow substantially]," Willis said.
The final option, which may be a bit of a gamble, is to just wait for more funds to be launched that act in a similar way to the Miton one.
Although there aren’t any launches planned yet, the way in which the Miton fund and others like it have grown recently, it wouldn’t be surprising to see several fund groups trying to get in on the action over the next year or so.
