Fund capacity has been a major talking point in the industry this year, with a number of groups such as Fidelity, First State, Aberdeen and Cazenove deciding to soft-close or stem inflows into some of their most popular portfolios to protect existing investors.
Soft-closures, whereby the fund is only available to existing unit-holders without prohibitive charges, are often welcomed by the experts as a sign that the managers are actively trying to maintain their investment strategy against issues surrounding liquidity.
However, some investors worry that when a fund is soft-closed, the managers pay less attention to it, an impression which is given credence by the fact they are often given new portfolios to run at the same time.
With this in mind, and following recent comments from our readers, we looked at how some of the most popular funds have performed following their decision to soft-close.
The results of the analysis suggest there is no clear-cut answer as to how a soft-closure affects a fund’s performance: though some funds have continued to beat the market and their rivals, the large majority have tended to underperform.
One such example is Findlay Park American, which at one time was arguably the most popular actively managed US fund with UK investors and is still the most widely held US portfolio with fund of funds managers – 54 of them count it as a top-10 holding.
The fund, which used to have a clear small and mid cap bias before it widened its universe to deal with liquidity, has massively outperformed its composite benchmark – 50/50 split between the S&P 500 and Russell 2000 – over five and 10 years.
Performance of fund vs sectors over 10yrs
Source: FE Analytics
Although it sits in the FCA Offshore universe, Findlay Park American has beaten every fund in both the IMA North America and IMA North American Smaller Companies sectors over 10 years. Only five funds in these two sectors have beaten it over five years.
However, since the group decided to soft-close the fund in early 2011, it has slightly underperformed against its benchmark.
FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies fund was another fund that soft-closed in 2011.
The portfolio had grown to £1.3bn, though the group did re-open it for investors via the Standard Life wrap.
Nevertheless, since it was originally closed it has had the 91st highest returns in the IMA UK Smaller Companies sector, which is made up of 98 funds.
Of course, it may not be the closure of the fund that has affected performance in these cases.
Nimmo, for instance, is a growth investor and would argue that as markets have had a period of recovery, value has been the most fruitful style.
The same could be said for Troy’s two popular, and now closed, funds.
The group closed Sebastian Lyon's Troy Trojan fund in April 2011. Since then, the £2.2bn fund has been the fifth worst performer in the IMA Flexible Investment sector.
However, Lyon has maintained a high exposure to defensive assets such as gold bullion and index-linked bonds while markets have rallied.
FE Alpha Manager Francis Brooke’s Trojan Income fund was closed earlier this year at £2.4bn. Since then it has been the seventh worst performer in the IMA UK Equity Income sector.
Performance of fund vs sector and index since May 2013
Source: FE Analytics
Brooke tries to deliver long-term outperformance with low volatility. To achieve this he tends to invest in quality large caps which this year have underperformed small caps and more cyclical stocks.
Aberdeen’s highly rated Emerging Markets and Global Emerging Markets Smaller Companies funds have underperformed against their relevant benchmarks and the IMA Global Emerging Markets sector since they were closed in March this year.
However Devan Kaloo, head of global emerging markets at the group, says this is down to the funds' overweight in countries such as Brazil and Turkey, where the local currency has weakened significantly.
First State, which is Aberdeen’s main rival in emerging markets and the Asia Pacific, has seemingly bucked the trend, however.
It took the decision to soft-close its First State Global Emerging Markets Leaders fund in May this year. Since then it has been a top-quartile performer and has beaten the MSCI Emerging Markets index.
The First State Greater China fund, which was soft-closed in 2011, has also continued its good performance. It has been the fourth highest returning fund in the IMA China/Greater China sector since then.
FE Alpha Manager Alex Wright’s five crown-rated Fidelity UK Smaller Companies fund has been the best performer in the IMA UK Smaller Companies sector since its launch in March 2008.
Performance of fund vs sector and index since March 2008
Source: FE Analytics
He took the decision to soft-close at £250m in April this year and though the fund's outperformance hasn’t been as high as in the past, it has still been a second quartile performer since then.
Cazenove UK Opportunities, which is headed up by FE Alpha Manager Julie Dean, has been one of the most popular UK funds with investors due to strong long-term returns. The group decided to stem inflows into the now £2.6bn fund in May this year, after it grew by around £1.3bn in just 12 months.
Although there have been grumblings that the fund has struggled since then, it has actually outperformed both the IMA UK All Companies sector and the FTSE All Share since the decision was made.
The conclusion is that investors shouldn’t take soft-closure in itself as a reason to be concerned.
While a number of funds have underperformed after closing, the fund’s strategy falling out of favour usually seems to be the cause.
