From Special Report: Investment Adviser Mid-Year Monitor
On the edge of closure
For a second year running, the number of IMA-listed funds in danger of closure or merging has increased
The number of IMA-listed funds potentially in danger of being closed or merged with a sister fund has increased for the second year running, from 58 in 2011 to 67, Investment Adviser research has discovered.
Of these 67 vehicles, identified using a metric incorporating Morningstar data, 40 of them appeared consistently in the third or fourth quartile of their sectors over one, three and five years, with the remaining funds all third or fourth quartile over five years.
Ben Seager-Scott, senior analyst at Bestinvest, says: “The number of red flag funds has increased this year, and this may partly be a function of undulating markets. Often such broad market movements are fairly indiscriminate, causing benchmark constituents to move largely together – for some unconstrained stockpickers who have high active positions versus the benchmark this could act against them and could be a reason we see more funds flagged this time around.”
In fact, the 38.86 per cent rise in the number of “red flag funds” is not surprising given the volatility in the markets in the second half of 2011, as Meera Patel, senior analyst at Hargreaves Lansdown, explains: “Even though this year started off well, the optimism was soon cut short as renewed worries over Europe has turned markets jittery. There has been an enormous amount of sector rotation from defensives to cyclicals and if a fund is on the wrong side of the defensive/cyclical play, it has been easy for funds to underperform.”
The 2012 list of ‘red flag funds’, which manage an average of £6.18m each, includes nine from the UK All Companies sector. However, the IMA’s three former Managed sectors have the most flagged funds combined, with seven in Mixed Investment 20-60 per cent Shares and four each in the Mixed Investment 40-85 per cent shares and five in the Flexible Investment sectors.
Closures or mergers so far
Of last year’s predictions, 30 funds have carried over into 2012’s list and 18 funds have since closed or merged, equivalent to 10.44 per cent, while already this year’s metric has identified two funds that are earmarked for closure or merger.
In April, Franklin Templeton announced an overhaul of its UK-based fund range including the closure of the £5.3m Franklin Global Reit (or real estate investment trust) fund and the merger of the £5.29m Templeton UK Equity fund into the £31m Franklin UK Managers’ Focus fund.
Meanwhile Scottish Widows Investment Partnership (Swip) is in the process of repositioning its equities business, including some fund closures. The company has three funds in the list: the Absolute Return Macro, Japanese Equity and UK Real Estate funds, which rolled over from the 2011 list.
A company spokesperson says: “Swip is beginning the process of transitioning a number of funds to its new equities strategy. This process will take some months and will result in the closure of a number of smaller regional equity funds that no longer fit with the revised investment strategy, in addition to some funds that due to their small size are no longer economically viable for Swip to manage.”