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Trimming the fat

The number of fund mergers has increased in recent weeks as firms look to cut costs in the current economic climate.

Indeed, after one of the longest bull runs in history, where at times it seemed almost anything packaged with any nous was sold en masse, a number of fund management houses – not all – have been left with an abundance of unpopular, underperforming funds.

It is fair to say the recent wave of fashionable fund launches has come and gone and a number of funds are becoming a burden on fund houses.

Proof of these worries is revealed by the Investment Management Association figures for September 2008 which show that UK-domiciled funds under management have fallen £88.6bn in the past 12 months alone.

Even more concerning is the fact that net retail sales were down £20.7m in September 2008, against September 2007’s inflows of £886.6m .

Some fund firms are beginning to make changes. New Star has introduced a number of mergers already this year, with both its Japan and North America funds merging into Pacific Growth and American portfolios respectively in June, while Tri-Star was merged in July despite being one of the firm’s biggest fund pushes.

More recent changes include Societe Generale’s decision to close its £27m Europe fund and merge the assets into its £69m European special opportunities fund, subject to FSA approval. The group is also looking to streamline its five-strong fixed-interest range into two, with its three gilt funds The group also plans to combine both its corporate bond offerings.

Meanwhile, Axa Investment Managers UK is also set to merge four of its funds as part of a deal to improve transparency.

Schroders head of UK retail Robin Stoakley says the costs associated with running a fund make further merges a likely.

“To run a fund properly you are talking at least six figures. So I would say a fund needs to be between £12m and £15m just to break even. In times like these money is not easy to come by, so I think many fund firms will look to streamline their business.” Hargreaves Lansdown investment manager Ben Yearsley adds: “Much depends on a fund’s profile. There is also a bit of a gamble as five years ago people were merging the likes of Latin America, which turned out to be the place to be.”

Yearsley notes there is simply not enough money coming through the door and that fund mergers and closures are likely to continue.

“If you look at the UK all companies sector, one-third of funds are below £30m in size. You have to question whether or not they are profitable at that level, particularly as assets are not coming into the sector.”

Credit Suisse multi-manager Graham Duce explains how it is not only funds that are set to merge but also investment houses.

“Consolidation will not be linked just to funds but also to firms across the board, whether it be boutiques or even big houses, a number of which have got into trouble recently. It is also something that us as multi-managers have to look at when selecting funds, whether the stability of the investment house behind them is sound.”

Informed Choice joint managing director Martin Bamford believes we will see more mergers on this occasion compared to the last downturn, due to the sheer number of product launches during the bull run.

He says: “We started to see a whole host of funds launched at the end of the last run as fund groups looked to capitalise on the money coming into the sector. Funds like agriculture and commodities that looked so attractive before vare not looking so hot now. Firms may also want to be seen to be doing more on this occasion and may end up focusing on some of the larger funds.”

PSigma Asset Management managing director Ian Chimes disagrees that esoteric funds that will be at the top of the hit list.

He notes that when it comes to cutting costs many fund managers closed funds during the last downturn only for them to fall back into fashion.

“I think it’s more likely to be the ‘me too’ offerings. For example, UK all companies has more than 300 funds, and some firms may have a couple of funds in there and more in other UK sectors. They are likely to be the ones that come under scrutiny as opposed to those esoteric offerings.

“It is also important to note that mergers and consolidations are not exactly a cheap exercise for fund managers; it can be very complex and needs shareholder approval.”

Chelsea Financial Services head of investments Matthew Woodbridge adds: “For advisers, it is a case of judging each fund on its merits. Further mergers will happen, but there will continue to be smaller funds that perform and funds not necessarily performing that will turn a corner at some point.”

More investment news and analysis at: www.moneymarketing. co.uk/investment

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