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Investor clustering slammed as ‘worrying indictment’ of asset management

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Investors in the UK’s most popular IMA sectors are funnelling the bulk of their money into a small number of larger funds, Money Marketing research shows, prompting fears of herd mentality and style drift.

Data from FE Analytics suggests the amount of money taken by the top three funds in the IMA £ Strategic Bond sector last year was equivalent to 93 per cent of the space’s net gain over 2012. This and similar findings have been labelled a “worrying indictment” of the investment management industry.

The strategic bond sector appears to have the most dramatic clustering, although the trend can been seen across most sectors. Richard Woolnough’s M&G Optimal Income fund took approximately £3.7bn in 2012, representing 71.9 per cent of the net flows into the year’s most popular sector, our research shows.

Meanwhile, the three top selling funds in the IMA £ Corporate Bond witnessed inflows 16 per cent larger than the sector’s net gain in 2012 while IMA UK All Companies’ three most popular funds captured almost double the sector’s net rise.

“Once a fund gains traction … other investors sometimes follow”

Many of the funds winning strong inflows are well-known products, looked after by managers with solid track records and impressive performance figures for recent years, which explains some of their popularity.

Hargreaves Lansdown investment analyst Richard Troue says: “In terms of why investors target just one fund I do think there is an element of herd mentality. Once a fund gains traction … other investors sometimes follow, building a lot of momentum.”

In the IMA £ Strategic Bond sector, the three bestselling funds were Woolnough’s £11.2bn M&G Optimal Income fund, Ariel Bezalel’s £1.4bn Jupiter Strategic Bond fund and Ian Spreadbury’s £1.3bn Fidelity Strategic Bond fund. All three have outperformed over three years.

However, investors do not always flock to products that have successfully built up a strong track record. For example, the £2.8bn Scottish Widows UK Growth fund was one of the top selling funds in the IMA UK All Companies sector – but the portfolio is ranked fourth quartile over one, three and five years.

Rathbone Unit Trust Management head of multi asset investments David Coombs, who describes such strong investor clustering as “hugely unhealthy”, thinks a number of reasons are causing investors to channel their money into too few funds – and claims a good track record is not always high among them.

“It is a worrying indictment of our industry. Everyone just buys the same stuff,” he says. “There’s lots of reasons why this is happening – fear, herding, too much focus on quartile rankings, too much focus on brand rather than performance.”

Simon Evan-Cook

Simon Evan-Cook

Despite of the criticisms of investor clustering, Premier multi-asset investment manager Simon Evan-Cook says the concentration of flows is “probably understandable” given the current climate.

He also points out that strong sellers tend to be funds that have already attracted a lot of assets and argues that investors are unwilling to take a risk on a new fund at present.

However, this leaves investors at risk of believing ‘bigger is best’ when it comes to picking funds – a conclusion the manager thinks is “potentially dangerous”.

“People really need to stand back and take a look at whether the amount of money they have taken in is compromising what they do,” Evan-Cook adds.

“Is it forcing equity managers up the market cap and away from the smaller companies that used to generate most of their alpha? Is it turning bond fund managers from credit analysts into macroeconomic analysts?”

In last year’s The State of the Universe report, Evan-Cook argued that ‘big is best’ is a “dangerous assumption” for investors to make and said a massive fund can “severely constrict” a manager’s process.

Managers of larger funds face a number of challenges that could limit their future performance – including being forced up the market cap spectrum, owning too much of a company or “losing their ‘hunger’ having attained success”, the study said.

Evan-Cook cautions against buying a large fund and automatically expecting the great performance of its past: “For all intents and purposes, you are buying a different fund from what it used to be. That past record is not so relevant and it gets less so the bigger the fund gets.”

“You have got quite a lot of funds doing really interesting things that have not taken a lot of money”

Thames River co-head of multi-manager Gary Potter agrees that the bulk of money heading towards relatively few funds “seriously concerns” him and also recommends investors consider smaller funds, which tend to be more nimble.

For some time Potter has not held any giant funds in the Thames River multi-manager funds he runs with Rob Burdett and has preferred their smaller counterparts in expectation of future outperformance.

“The only game in town at the moment is buying big funds because people see that to be low risk,” Potter warns.

“You have got quite a lot of funds doing really interesting things that have not taken a lot of money. Therefore, I do not think the trend is a positive one for future capability and potential future returns.”

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  1. Maybe investors go for these funds because they get print space in certain money sections of popular news publications as being the top seller?

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