The sector has not proved to be an easy place for investors the quarter ending 1st April, the sector average fell 4.6% with only newcomer Liverpool and Victoria UK Money Markets posting positive returns. Additionally the volatility of the sector has increased from 2.6%, annualised over 3 years, to 3.15%.
The most striking trend over this period has been the contrasting performance of smaller funds over larger funds. Assets under management dropped by some £100m in the period ended 1st April. While capital flows out of mutual funds in general have ensured fewer assets under management across the sector as a whole, the figures still suggest that the conditions are favouring the smaller funds in the sector.
Looking at the assets under management (AUM) of the funds to change rating, the trend becomes clearer. The five funds losing the 3 crown rating have combined AUM of £3.6bn and have been replaced with five funds whose combined AUM is £2.5bn.
| Funds Losing 3 Crown Rating | Fund Size £m | Funds Gaining 3 Crown Rating | Fund Size £m |
| M&G High Yield Corporate Bond | 918.5 | L&G High Income | 1,278.3 |
| New Star Fixed Interest | 900 | SWIP High Yield Bond | 597 |
| Artemis High Income | 812.4 | Scottish Widows High Income Bond | 292 |
| Standard Life Higher Income | 547.5 | Gartmore High Yield Corporate Bond | 265 |
| Threadneedle High Yield Bond | 410.7 | JP Morgan Global High Yield Bond | 80.9 |
Only the L&G High Income fund appears to buck the trend. Without this outlier the difference is even starker. Indeed between the two periods the average fund size of a 3 crown rated fund has fallen from just over £87m to around £70m. By contrast the average fund size of a 1 crown rated fund fell by just £1m.
The fact that all five funds gaining the 3 crown rating have done so by producing significantly higher alpha than those they replace, while they remain roughly on a par when comparing the other two components of the crown ranking, consistency and volatility, starts to paint a clearer picture.
While in the past a large fund size has given investors confidence, that may no longer be a valid estimator of ability. Smaller funds seem to be fairing better than their larger cousins. The recent market turbulence and global downturn has reduced the number of quality opportunities, something large funds, with more money to invest, are feeling more than small funds. This is exemplified by the fact that the best performing fund over the period was newly launched Liverpool and Victoria UK Money Markets with a fund size of only £37.4m.
Fixed income investments are usually considered a safe haven by investors in an economic slowdown, and with interest rates likely to fall in the near future, the interest rate sensitive nature of fixed income investments should see prices increase, helping to boost the market value of many funds balance sheets. However with much of the current market uncertainty stemming from the credit markets, the short term future of the sector is anything but certain.
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29 April 2008