Fewer funds at risk of closure, research shows

The list – which was established in 2010 and uses data from FE Analytics plus the metric outlined on the right – shows 21 of the 58 funds identified have fourth quartile performance against their respective peer groups across one, three and five years, while the remaining 37 all have third or fourth quartile performance in five years.

The 13.43 per cent decline in the number of red flag funds is less surprising when you consider the recent spate of closures in the fund world. Figures from the IMA show 64 funds were either closed or merged in 2012, while 140 were launched.

This year’s list includes seven European-focused funds. Ben Willis, investment manager and head of research at Whitechurch Securities, points out that such funds have fallen out of favour in the wake of the eurozone struggles.

“Due to the concerns over the eurozone, these funds will not only have been hit by outflows but also the ability to attract new monies,” says Mr Willis. “They will [also] have been hit hard by the ‘marketing/distribution’ factor, as any new monies to the region will have undoubtedly gone to the higher profile or better-known names.”

While some funds have made a first-time appearance on the list, there are nine funds that have appeared for three consecutive years.

These include two EFA funds and two Elite funds, which, along with a further two EFA funds on the 2013 list, make it the second-largest grouping of funds in this year’s data. Way Group, the authorised corporate director (ACD) of these funds, declined to comment on the findings.

Adrian Cammidge, head of investment communications at Kames Capital, which manages the Kames Global Equity fund, explains: “We recognised the fund was not performing to our expectations; as a result, we made a number of changes to our overseas equity capabilities.

“These changes included the appointments of Piers Hillier as head of overseas equities. Piers subsequently became a co-manager on the fund, as did Pauline McPherson. As a result, while the longer-term performance is still not to our expectations, the Global Equity fund is now first quartile in one year, and we hope this success will continue to play out in the longer term.”

Meanwhile, Marlborough Fund Managers, which last year had seven funds in the list, has just three in 2013, although the Marlborough European Trust and the Marlborough North American Trust have appeared consistently.

Nicholas Cooling, deputy chairman of Marlborough, says: “We are committed to achieving outperformance for our investors, and since Marlborough took over these three funds less than three years ago, each has had a change of lead manager.

“The performance of the Marlborough North American Trust has shown significant improvement, and the fund is now second quartile in one year and first quartile in three and six months. The management of the Marlborough Emerging Markets Trust was recently brought in-house, and the investment team has been working intensively to replace holdings and turn around performance.

“On the question of fund size, commercial viability is largely decided by cost rather than size, and our funds are administered in-house on a highly cost-effective basis.”

Legg Mason also has two funds in the list, including the Legg Mason Continental European Equity fund. A spokesperson for the firm says it has “no immediate plans to rationalise or change these products. We are, however, constantly looking at the funds in our range”.

Adrian Lowcock, senior investment manager at Hargreaves Lansdown, notes: “It is important to consider when the fund was established. Some management groups like to set up funds years ahead of when they think the market will become more interested in the fund.

“Likewise, if an asset class becomes unpopular with investors, you could see money flow out of the sector and funds no longer become viable. Companies also evolve and expand or contract, so funds are launched into new markets or closed as a group refocuses the business. Part of a healthy industry is that it’s always evolving.”

The largest collection of funds in the list are seven CF funds that include products run by Danske Bank and Kleinwort Benson. A spokesperson for Capita Financial, the ACD for these funds, states: “Capita Financial Managers keeps under review the position of small funds in accordance with its relevant policy and the specific circumstances of each fund and its underlying investor base. It is inappropriate for us to comment on individual funds, as any proposed action would first be communicated to investors.”

Among the 18 funds that have recurred from the 2012 list, a spokesperson for the Swip Absolute Return Macro fund notes: “We recently repositioned the investment strategy of the fund to further diversify its investment approach to focus not only on equity and bond strategies but to incorporate a larger proportion of relative value investments to drive fund performance.

“This qualitative approach is in the process of being complemented by a quantitative investment dimension managed within a robust risk framework. We believe these changes will help deliver improved performance going forward.”

Other recurring funds include the Clerical Medical FTSE 100 tracker, which a spokesperson notes has appeared to underperform because the sector mainly consists of actively managed funds.

Meanwhile, Ralph Baber of Slater Investments points out that the MFM Bowland fund was established for one individual investor in 1999 and has never been marketed. As such, there are no plans to close the fund or raise additional capital for it.

With market conditions looking optimistic, at least for the moment, many of these funds could improve performance, which could lead to more assets and thus increase their appeal to investors.

Nyree Stewart is deputy features editor at Investment Adviser