This can sometimes cause them problems as it limits their flexibility and means they may no longer be able to hold the smaller or mid-sized stocks which helped them to outperform in the first place.
Our data shows that some of the UK’s largest and most popular funds performed better when they were smaller, although it is hard to know whether this can be attributed to size. And it is not always the case that growing big sees a fund underperform.
A number of readers have voiced concerns about the growing size of FE Alpha Manager Julie Dean’s five crown-rated Cazenove UK Opportunities fund.
It has certainly grown rapidly, having been just £63m three years ago and now standing at £2.7bn.
The group attempted to dissuade new money by soft-closing the portfolio last year.
However, our data suggests that the fund has continued to do well even at its much-swollen size.
According to FE Analytics, in the period between February 2008 and February 2011, the fund was a top quartile performer in the IMA UK All Companies sector and had comfortably beaten the FTSE All Share.
Over the three years since then, it has also been a top quartile performer and comfortably beaten the index. It has achieved that by delivering top quartile returns, which have been much higher than the index's, in 2011, 2012 and 2013.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
It has also outperformed since it was soft-closed in May last year.
However, investors may be concerned because they have seen that the fund has slipped into the third quartile over three and six months, although this is a very short period of time.
Charles Stanley Direct’s Rob Morgan has warned that size would be an issue for someone like Dean who tends to have a high turnover rate to benefit from the business cycle.
Schroder UK Mid 250 is one example of a fund that did grow too big, and its FE Alpha Manger Andy Brough is happy to admit it.
"The fund grew too big at £3bn and when you’re running a fund that big there’s no point chasing your positions,” Brough said to FE Trustnet in 2012.
Our data shows that the fund grew from £800m to £3bn between 2003 and 2007. Over that time it performed well compared with its FTSE 250 ex IT benchmark, but as the graph below displaying relative performance shows, it dropped off significantly after that.
Relative performance of fund vs index over 10yrs
Source: FE Analytics
The fund’s size has plateaued at around £1.5bn over the last three years and over that time it has outperformed its benchmark, beating it by 15 percentage points.
Sticking with the UK All Companies sector, M&G Recovery has grown to a hefty £7.1bn.
Although our data shows that it was still a relatively large £1.4bn 10 years ago, its assets under management have grown by around £3bn since 2009. Over that five-year period, it has underperformed against both the sector and the FTSE All Share over that time.
The fund failed to beat the market and the sector in 2011, 2012 and 2013. Over all three of those years, the fund has averaged an AUM of around £7bn.
FE Alpha Manager Tom Dobell, who runs the fund, says that recent underperformance has been down to stock-specific issues.
Whitechurch’s Ben Willis has told FE Trustnet that if the fund were too much bigger it could cause issues. However he says that given Dobell’s preference for recovering large cap stocks, the strategy is genuinely scalable.
One fund that Willis says has changed due to size is FE Alpha Manager Nigel Thomas’s AXA Framlington UK Select Opportunities fund.
He says that while the manager still looks for the same stock characteristics, the fund used to be split relatively evenly between small, mid and large caps. However, given that it is now £4.7bn, it is much more biased towards the larger end of the market.
Our data shows that this time 10 years ago, the fund stood at just over £200m and reached £2.5bn in 2011.
Between 2004 and 2011 the fund was a top-quartile performer in the sector and comfortably outperformed the FTSE All Share, with returns of 112.44 per cent. Since then, however, the fund has still outperformed but it has only been a second quartile performer.
That could suggest that size has impacted performance to a certain extent, because 2012, when the fund had been on average £3bn, was the only calendar year when it failed to beat the sector.
However, Rob Bailey, head of UK wholesale distribution at AXA, says that size isn’t affecting the way in which the fund is managed.
“The fund has assets under management of £4.86bn (as at 21 February 2014). We do not have concerns over ‘capacity constraints’ as we closely monitor and review all of our funds at prescribed intervals,” Bailey said.
“With its low turnover it is well suited to long-term investors and the fund has continued to outperform, even though it has been growing consistently over the 10-plus years that Nigel has been running it.”
Willis still rates the fund, despite the fact that its make-up has changed.
“It may not be as dynamic as it was, but he has still done well and it is now more of a core holding,” Willis said.
Neil Woodford’s – soon to be Mark Barnett’s – Invesco Perpetual High Income fund is the largest UK equity portfolio, with an AUM of £13.6bn. It is the best-performing portfolio in the IMA UK Equity Income sector over 10 years as well.
However, its relative performance against the sector average was better between 2004 and 2008 (when it grew from £3bn to £8.5bn) than it has been in the period after the crash (when it grew from £7.3bn to its current level) where it has been a third-quartile performer.
Relative performance of fund vs sector over 10yrs
Source: FE Analytics
While size could be a factor, what the graph really shows is that the fund performs better in falling markets than it does in rising ones. This is a feature of large caps, too, however.
Data provided to us by Premier’s Simon Evan-Cook shows the proportion of the High Income fund’s mega cap exposure has increased from 12 per cent in 2004 to 50 per cent in 2012.
Most commentators agree that given the current size of the funds, Woodford and Barnett will struggle to take a large position in a mid or small cap company without owning a large amount of its shares in circulation.
A spokesperson from Invesco Perpetual said that investors have little to worry about, however.
“Woodford and Barnett’s approach, style and philosophy lend themselves to managing large sums of money – both are long-term investors, with low portfolio turnover and far higher than average holding periods.”
“In addition they benefit from being part of a highly experienced and talented team who have worked together for many years throughout many different market conditions.”
The performance of the now £6.4bn Artemis Income fund has also seemingly tailed off during the period after the financial crash, over which time it has grown by £3bn, despite the fact it sits in the top quartile over 10 years.
It has failed to beat the market in three out of the last five discrete calendar years, for instance.
However, the managers on the fund have tended to maintain a bias to large cap stocks throughout the last decade, so it could just be that the fund’s style has just been out of favour. All three of the years it outperformed were rising markets, as well.
FE Alpha Manager Adrian Frost, who runs the fund, says he sees no issue with its current size but admits it is something he keeps a close eye on.
“The fund’s long-term performance and its popularity will continue to allow us some control over capacity via pricing. Meanwhile, as part of continuing to meet our existing investors’ expectations, we monitor capacity regularly,” Frost said.
While by no-means one of the largest funds in the UK sectors at £2.5bn, Ben Willis says that JOHCM UK Equity Income is one fund that has been affected by growing inflows as its exposure to mid caps has dropped in recent years.
“They said that when the fund reached £750m, they would review it and when it got to £1bn they would look to soft-close it, which they have in some respects, but it has since more than doubled in size as investors can still get into it,” Willis said.
Our data shows that between 2005 and 2008, the fund grew from £80m to £150m and while it currently stands at £2.5bn, it had been £588m in 2010.
However, FE Analytics shows that the performance of the fund hasn’t dropped off, given that it was top quartile in 2012 and 2013.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
James Lowen, who manages the fund with Clive Beagles, says that although the performance has been good, they don’t want the fund to grow any bigger.
“We are very comfortable with the current fund size and are not seeking to grow the fund, via inflows, significantly from this level. To that end, we have not actively marketed the fund for many months and have turned away substantial new business in the past year,” Lowen said.
Lowen also says that the fact they have been increasing their exposure to large caps is coincidental as that is where they see the best value.
While Willis agrees that the better value is probably in the FTSE’s largest stocks, he says it is quite a short-term view.
“I think they are deferring the problem, not solving it,” Willis said. “Yes, large caps have been left behind in the rally but what happens when mid caps are once again screaming value?”
“They probably won’t be able to buy them, or they will have to increase the number of stocks they own in the portfolio.”
Lowen still holds 40 per cent outside large caps and is confident that he can continue to maintain, or even increase, that exposure.
“Our close ongoing analysis of the fund’s liquidity underpins our confidence in being able to increase this exposure to higher levels without difficulty should we find appropriate individual investment opportunities,” he added.
