Investment houses will have to remain vigilant

If a fund is too large then this can prove problematic – a large amount of assets can make it difficult for managers to move in and out of investment positions effectively.

Investment Adviser research, using data supplied by Morningstar, shows the 20 largest funds in the IMA sectors have combined assets – both retail and institutional – of approximately £247.7bn. The largest of these is the £29.5bn Templeton Global Bond, run by Michael Hasenstaab, while the smallest of these, the Carmignac Investissement Latitude and the Blackrock Global Funds World Mining, have still accumulated roughly £7.1bn of assets each.

Within the top 20 largest funds there are a number of well-known names including the £12.3bn Invesco Perpetual High Income fund and £9.5bn Invesco Perpetual Income fund, both run by Neil Woodford. In addition M&G, Newton and Aberdeen all appear in the table right.

Soft closures are more common in funds targeting less liquid markets such as global emerging markets equities or small-cap focused products, while other markets such as global fixed income or large-cap equities are more suited to large-scale investments.

Some of the more recent soft closures have included a number of First State products, including the £7.2bn First State Asia Pacific Leaders product, run by Angus Tulloch, as well as the £10.8bn Aberdeen Global Emerging Markets fund run by Devan Kaloo, which recently announced plans for a higher initial charge to try and stem inflows.

Ben Willis, investment manager at Whitechurch Securities, notes that First State has never been shy in closing funds, but adds: “It is not as big a problem as a global emerging market fund closing as there are a number of alternatives out there. However, this has been our default choice for exposure to this area for years.”

Invesco Perpetual’s High Income and Income products, both industry behemoths, are arguably examples of fund managers avoiding the need to soft close a fund by altering their investment processes to avoid capacity constraints.

Mr Willis says: “[Neil] Woodford is a case in point whereby he has had to adapt his investment process in order to continue to deliver, though he has always employed top-down analysis as the starting point of his process. Due to the amount that he manages, Mr Woodford now has to take some longer-term views on the markets than before in order to position the fund portfolios. Because of this it is reasonable to expect periods of short-term relative underperformance.”

There are others, however, that don’t believe size to be a problem. Gavin Jones, chartered financial planner for Old Mill Group, says: “You only have to look at the Pimco and Neil Woodford funds that have been running at a large size for a long time now. His [Mr Woodford’s] contrarian positions are combined with some financial management to avoid moving his underlying share prices too much when he is increasing or decreasing exposure

“We think there could be an advantage with a larger size. We advocate lower portfolio turnover and this seems to be a feature naturally due to the physical task of selling or buying a large position in a stock. High portfolio turnover is more likely to provide a drag on overall performance,” adds Mr Jones.

Some asset management firms argue there are no limitations on the size of their strategies due to the excess liquidity available in the sectors in which they invest. European investment house Carmignac rules out any capacity restraints on their £24.6bn Patrimoine fund and £7.1bn Investissement fund.

“If some markets are illiquid we avoid investing in them,” explains Sandra Crowl, a member of Carmignac’s investment committee. “These funds have a large cap focus ensuring that the equities positions are scalable.”

Other popular investment portfolio staples appearing in the top 20 include M&G’s £11.2bn Optimal Income fund, run by Richard Woolnough, and the £7.6bn M&G Recovery strategy, run by Tom Dobell. M&G has previously taken steps to slow funds into Mr Woolnough’s corporate bond offerings, which sit outside the top 20 largest funds, over potential liquidity concerns in the corporate bond sector and is currently ruling out the future soft-closure of both vehicles.

In a statement, the firm said: “In the world of retail funds, our funds do appear to be rather large. But in the institutional world, a fund of this size really wouldn’t look unusual at all. Not surprising perhaps when the aggregate value of the companies making up the FTSE All-Share is roughly £2trn. Size isn’t an issue for us.”

The list of the 20 largest funds highlights outperforming funds that continue to attract investor inflows. But with some funds nearing the £30bn mark and even the smallest of the top 20 soon to reach double figures, investment houses will have to remain vigilant to stop size becoming a detractor from performance.

Katie Holliday is a freelance journalist