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Small funds are set for a shakeout

Fund firms are doing their utmost to cut costs to improve efficiency.

Cue a spate of closures and mergers across funds that the respective providers believe will fail to gain traction and be profitable at a time when waiting for things to happen is not an option.

Research by Money Marketing, in conjunction with Financial Express, shows 23 of the leading 50 fund firms have more than 10 funds under £50m in size, raising questions about their profitability.

F&C tops the list with 25 funds under the £50m barrier, closely followed by Swip with 23, while Legal and General Unit Trust Managers, Skandia Investment Management and Credit Suisse Asset Management Funds UK all have 19.

The figures also show that across all IMA sectors there are a total of 1,215 funds under £50m.

F&C recently highlighted the problem itself, pointing to recent research by the firm on the UK all-companies sector showing 30 per cent of funds are shy of £30m in assets.

F&C director, head of corporate affairs Jason Holland says the group has a broad product range, pointing to the group’s numerous mergers in the past, but says it will not shy away from rationalisation.

He says: “Bear in mind that over the last couple of years we have launched a number of new products as part of our three-year plan. These include the four lifestyle funds as well as more specialist products such as our recent active return fund launch, F&C global climate change opportunities and the F&C ethical bond fund. Inevitably, a number of the more recently launched funds will be small at this point in time,al though very much ‘front-foot’ products in our offering.

“Some of our smaller funds are also, in fact, mirror funds of products we offer offshore, so in terms of scale of strategy, etc, you need to consider these in their totality. However, we keep our range under review based on client demand and the investment case.”

Of course, mergers are taking place in droves by fund firms in a bid to bolster efficiency. Schroders, which sits halfway down the list with a total of 11 funds, recently announced its intention to merge its £150m UK select growth fund, managed by Edward Meier, into the £313m UK equity fund as well as the planned closure of its UK income defensive fund, managed by John Teahan, less than a year after launch.

Schroders managing director of UK retail Robin Stoakley believes that for every fund launched in 2009 another 20 are likely to be consolidated.

He says: “You only have to look at the number of funds in the UK all comp-anies sector that are struggling for critical mass and subsequent profitability and it makes sense to rationalise ranges further and that will be the order of the day. We will be looking at our range globally in 2009 and I expect every fund manager will be doing the same.”

Investec Asset Management managing director of UK distribution David Aird says fund companies will be asking themselves whether it is worth continuing the management of long-term funds that are struggling to get past the £50m-£100m barrier as they do not benefit either the firm or the investor.

He says: “It is interesting to note that the IMA figures for December 2008 show that £360bn in assets under management is being shared out among 2,343 onshore funds. That is only £13bn more than there was in December 2005 and when you consider the number of funds that have been launched, there is bound to be some contraction.”

Money Marketing research has also revealed the 25 leading fund firms have lost a combined total of £48bn of assets in 2008. Fidelity International saw £8bn of its retail and institutional funds under management wiped out in a calendar year, equating to a loss of 28 per cent.

Rathbone and Legg Mason both saw assets halve in the past year, falling by 49 and 51 per cent respectively, while SVM, Credit Suisse and New Star all saw assets plunge by more than 40 per cent.

Rathbone marketing manager David Holloway says: “Our strength has been equity income and value funds in general and this is the area of the market that has felt the credit crunch hardest. However, we do feel we are on the cusp of a change in sentiment as those areas move back into favour.”

Skerritt Consultants head of investments Andy Merricks agrees that the falls would be dependent on where a firm’s assets lie, as much as the actual set-up.

He says: “Investment management is about defending assets in the bad times as well as growing them in a bull market. That said, if you are in a certain asset class at the wrong time, there is only a certain amount that a fund firm can do.”

Hargreaves Lansdown investment manager Ben Yearsley says: “With the FTSE 100 down by over 30 per cent in 2008 and people withdrawing their money, it is no surprise to see these sorts of figures. However, rather than steering clear off the back of statistics like these, I think investors who have stuck with their investments will be encouraged to come back into the market again at some point.”

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