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Crunch time for small funds?

Nearly 500 UK retail funds are running with less than £10m in assets, research from Money Marketing has found. The survey, in conjunction with Financial Express, raises questions over how profitable it is for fund firms at a time when the credit crunch is pushing profit margins to the limit.

Take a £10m fund with an annual management charge of 1.5 per cent. Half of that would go to the IFA, meaning that the firm would be left with 75 basis points, which means a £75,000 income to spread across the likes of fund managers, compliance and marketing and so on.

These are ballpark figures but eyebrow raising nonetheless as it may suit some small boutiques but the long-term viability of running a fund of that size has to be questioned.

Hargreaves Lansdown senior analyst Meera Patel says HL has been keen to support smaller funds as they may look to capture growth in the early days or offer something genuinely different to the market.

She says: “There is rationale but if a fund has been around for a long period of time, then questions have to be asked. What annoys us is when firms have a number of small funds with poor performance but choose to continually launch new funds rather than address the current range. Some of the bigger fund firms can justify having some smaller funds from a business perspective as the larger ones can look after them over the piece but it is hardly ideal.”

Informed Choice has revealed its first LemonAid report, which highlighted a total of 270 underperfor-ming funds with £30bn in assets across numerous sectors. One of the judging criteria for these “lemon” funds is fund size.

Informed Choice director Martin Bamford says: “It would be great to see more consolidation among fund firms to counteract these struggling funds that are not really benefiting anyone. Many of these funds are not very popular and one of the issues we found was that almost one-third of funds on the list which we knew were small in size would not divulge the exact amount.”

Numerous firms have streamlined ranges follow-ing poor-up take. Last year, Credit Suisse multi-managers Graham Duce and Aidan Kearney merged the group’s European, North American and Japanese funds into the international fund and the Asia Pacific fund rolled into its emerging fund.

The four regional offerings had only garnered £75m of assets in six years, with the team stating that it would be able to deliver better returns by spending more of their time concentrating on fewer focused international funds.

Credit Suisse vice-president of multi-manager portfolios Scott Spencer says: “It was all part of improving our service and I would say the fund sizes were a secondary issue. We still have no issue putting money into small funds provided they offer us something different, particularly as moving to a Nurs structure allows us to hold 100 per cent of a fund as opposed to 20 to 30 per cent under previous guidelines.”

Aegon Asset Management was one of the forerunners in this market, having made the decision to close a number of its marginal funds, eventually bringing the firm’s range down from 25 to 11.

Head of sales for retail funds Steve Kenny says: “We took the view that we could not make decent penetration in areas such as Latin America, Japanese and US smaller companies among others, all of which are small sectors with a couple of champions. You are looking at a small slice of a small pie. These were all really good funds but from a commercial perspective there are mainstream sectors which are likely to be more fruitful. In the likes of Latin America, you are hoping that a champion like Baillie Gifford is in that market begins to struggle. There are far too many ifs and buts to that scenario.”

One example of this in the difficult current markets is the Elite RAB funds ICVC, which has announced its intended closure, having taken in just £4.4m since launch, claiming that despite encouraging investment in the company, there is “little prospect of an increase in size in the medium to long term”.

This makes the company both uneconomic for shareholders because of the disproportionate fixed costs on a small fund and for the investment adviser – WAY Fund Manager Limited – because of the modest revenue stream of charges.

Barings Asset Management marketing director Ian Pascal says his firm has closed funds in the past if demand does not look to be there but it is a bit of a risk. He says: “There have been numerous occasions where a fund has stayed at a small size and all of sudden has seen a flood of assets. It is a case of making sure of the long-term prospects. Five years ago many would have looked to close India funds whereas now they seem to be in demand.”

By the same token, a number of tech funds were in the market over five years ago only for a handful still to be in the marketplace today.

Bestinvest senior analyst Stephen Marriott says: “The line has to be drawn at that £10m barrier as it begins to eat into performance. I don’t think that necessarily means more consolidation but you want a fund to run well and be profitable for all involved.”

More investment news and analysis at: www.moneymarketing.


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