Launches still outpace closures, at least among open-ended funds, but it is a close race and one that is likely to become even closer, considering the current market environment where attracting new assets and investors into funds becomes more difficult.
There are 2,223 Oeics and unit trusts listed with the Investment Management Association although this number falls to 1,712 if only those UK authorised funds open to retail investors are looked at. This means excluding private and institutional funds with a minimum investment of more than £50,000.
Cauldron Consulting notes that there was a universe of 1,768 open-ended funds almost a decade ago, rising to 1,976 in 2002 and falling back to 1,966 in 2003.
The 2003 figure looks higher than today but it is believed this figure includes those funds the IMA now considers to be private or institutional in nature. So although the fund universe has grown over the past five years, it is difficult to determine if that growth has been in pure retail products or in both retail and institutional.
On the other side of the retail investment world are investment trusts. Here, the universe is shrinking although the sector continues to see new launches. The Association of Investment Companies says in 2003 there were 370 investment companies, excluding venture capital trusts, compared with 321 as of April 30, 2008.
Witan marketing director James Budden notes that the investment trust universe has not grown in conventional areas like generalist trusts while there has been an increase in more specialist vehicles such as property, absolute return and infrastructure trusts – areas he feels are quite suitable to the closed-end world. The structure of investment trusts means they are better able to withstand storms or difficult times in specific asset classes, not having to suffer the kind of redemptions that can occur in open-ended funds.
Looking at the number of open-ended launches, Morningstar data shows that within the mainstream IMA sectors, excluding pensions and the 184-strong unclassified sector where a lot of new launches reside, there are 499 funds without five-year track records. The greatest number of fund additions over the five years to the end of April is seen in the UK all companies sector, all managed sectors and the specialist sector.
There are 86 funds in the giant UK equity sector without five-year track records, 40 in active managed, 45 in balanced managed and a further 65 in the cautious sector. This is unsurprising, considering the trend towards more specialist funds. There are 65 listed in that sector that do not yet have a five-year performance record.
Interesting, too, is the fact that not a single IMA sector shows a reduction in the number of funds available over five years, not even the less popular sectors such as North American or Japanese smaller companies. Every sector shows more funds listed today than five years ago, bar the zeros sector where the number of funds is stable at four.
It is easy to identify launch trends but closures are hard to pin down – unless, of course, your clients had money in that fund. Fund mergers are more publicised than closures, as seen with the doing away of the once popular and multi-billion-pound Invesco Perpetual European growth fund when it was combined with its European equity fund this spring.
Some fund management companies have stressed that it is unmanageable economically to run a portfolio under £20m. Others place the figure closer to £10m, citing that shareholder/unitholder communication, custodian, managerial and admin costs make it unprofitable.
Lipper figures show there are more than 400 funds open for investment that are less than £20m in size and 227 are below £10m, leading to the question of which of these will survive the coming months, especially considering the cutbacks and difficult market environment that firms are facing.
Many portfolios seem to drift away for other reasons, such as manager departures, lack of investor demand or, most common, underperformance. All these factors make it difficult to determine which of the new launches will make it.
The closures have few recognisable trends. There are the obvious out of favour areas that shrink – just look at the tech and telecoms sector. At the moment, there are 14 funds listed in this sector although at the height of the tech boom there were probably more than double that number.
Yet this does not even touch the sheer number of closures or mergers that have occurred over the years. Not attracting enough assets, for whatever reason, is the main rationale behind funds being closed down, which again makes it difficult when investing in a new launch to judge whether it will capture enough investor attention to be around for the long haul.
The size of boutique funds still presents a problem in this regard. The list of funds under £20m does feature a number of big investment firms but the majority would appear to be boutique funds. That said, many of these boutiques do not mind their funds being small and if the investment company is correspondingly small, reducing overall staff and other costs, even sub-£20m funds could still be viable.
Judging the opportunity of an investment is not just about believing in the manager, the theme or the fund. In many cases, it is also about trusting in the group backing the portfolio.
In these tougher market conditions, it will interesting to see which funds are still around in the next five years.