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Johnson: Fund managers prioritise profits over performance

21 April 2013

The founding partner of Somerset says fund managers should spend less time marketing their funds and speaking to the press and more time researching potential investments.

By Joshua Ausden,

Editor, FE Trustnet

Many large asset managers prioritise asset-gathering above performance, according to Somerset’s Dominic Johnson, who believes fast-growing giant funds are bad news for investors.

ALT_TAG Johnson (pictured), founding partner of the group, prides his emerging market boutique on protecting the interests of existing and future investors, which he says is not always the case for larger institutions.

"Most fund managers are paid to gather assets, not to outperform," he said.

"We’re a good old-fashioned partnership, which we feel leads us to being a more stable business."

"We’re all about performance, which we think speaks for itself. We’re not inclined to push for short-term inflows, but stable business over a 25- to 30-year horizon."

Johnson says that unlike most large fund houses, the managers at Somerset dedicate very little time to marketing their funds.

"We try to keep that kind of thing to an absolute minimum, which is why I’m here talking to you today," he said.

"Rather than them bringing in a bit more money, I want the managers to be out there getting better performance. We think this is a far more sustainable way of running a business."

"Performance has to be the most important thing. When the fund house and the investor have differences in interest, then that’s when you get real problems. It should be: ‘if they go down, I go down'."

Johnson thinks capping a fund at a certain size is one of the most important ways of protecting clients, because it ensures that those buying it after a period of strong performance are buying into the same strategy.

He says this is particularly the case in emerging markets, where there is traditionally less liquidity, making big trades more difficult.

"There seems to be this idea that 'if it’s big, then it must be good', but this isn’t the case," he continued.

"Some of our very large competitors are very good managers and have performed amazingly, but there is no link between size and quality."

"Indeed, it can make things more difficult if you get too big. You can shoot the lights out when you have £100m, but I can guarantee that you’ll find it a lot more difficult to do that at £10bn."

Somerset has already soft-closed its Emerging Markets Small Cap fund. There is an on- and offshore version of the fund, bringing the total size of the strategy to around $450m.

"We had a target of $400m, but actually closed it a little early, when it was at $350m," he said. "It’s now at $450m, so we’ve stemmed the flows very successfully."

"This is the way to do it, but is very different to how a lot of others do it."

Johnson says there is a big difference from officially closing a fund to investors and simply saying it is soft-closed, which has no official definition.

Some fund houses allow investors to add to existing positions, and others keep the fund open to new investors if they use a certain platform. In many cases, fund houses opt for both options.

However, Johnson assures investors that when Somerset soft-closes a fund, "closed means closed".

"We do it by putting an initial charge of 5 per cent on the funds, and this includes the money coming from people already invested," he explained.

"This isn’t a way of squeezing money out of investors, though."

"We’ve had emails from potential investors since the closure and we’ve reminded them on every occasion that there’s an extra charge. We’re not looking for money to come in."

This way of running money has led to very strong performance for Somerset’s three emerging market funds – particularly Somerset Emerging Markets Dividend Growth and the soft-closed small cap fund.

Both are top quartile performers in their IMA Global Emerging Markets sector since their respective launches, and have beaten their MSCI Emerging Markets benchmark in the process.

Performance of fund vs sector and index since launch


Source: FE Analytics

Johnson says Somerset has every intention of soft-closing its Emerging Markets Dividend Growth fund when it reaches $2.5bn.

"Funnily enough, this is the same size at which a lot of small cap funds are capping inflows," he added.

Among the largest small cap emerging markets funds in the IMA unit trust and OEIC universe are the $3.42bn Aberdeen Global Emerging Markets Smaller Companies fund, and $4.96bn Aberdeen Global Asian Smaller Companies fund.

Looking at offshore universes, the WisdomTree Emerging Markets SmallCap Dividend fund is another standout portfolio in terms of size. Assets under management (AUM) are currently at $1.19bn.

Another industry expert, who wishes to remain anonymous, believes there is a particular problem with large funds in the small cap market in regions such as Asia.

"I spent 20 years in institutional management and that’s how the big asset managers make money [asset gathering]," he said.

"If you run a $5bn Asian small cap fund, it’s incredibly difficult to find attractive new ideas that are liquid enough for you to take a 5 per cent position in, and to get out when you want to. You cannot do it because you are too big."

"So maybe this is one way of continuing to grow assets from more liquid sectors. However, you have to question whether it’s in the best interests of investors."

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.