Soft closure issue plagues model portfolio managers

Model portfolio managers are being forced to sell out of some of the UK’s best-performing funds due to a technical issue.

The problem puts them at a disadvantage to their multi-manager rivals.

The issue involves funds that ‘soft close’ – an increasingly common practice in which a fund manager brings in punitive initial charges to discourage new investors from joining the fund.

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Soft closing heads off the performance issues that can strike if a fund is allowed to become too large, but existing clients of the fund can remain invested and continue their regular top ups without the extra charges.

Multi-manager funds are able to take advantage of this existing client status to remain invested in soft-closed funds, but any new investors using a model portfolio would be hit with the punitive charges on soft-closed holdings because they are not investing via a collective structure.

Model portfolios would also be unable to ‘rebalance’ – a regular process of adjusting their weightings – without clients being hit by the fees.

The issue has come to light after the soft closure of the hugely successful £4.2bn First State Global Emerging Market Leaders fund on the weekend, leaving model portfolio managers with few alternatives in the popular emerging market space.

Barry Cowen, senior investment manager at Sanlam International Investments, has had to sell out of the First State fund in his portfolios, which are based on the Skandia platform.

Barry Hood, quantitative analyst on Brewin Dolphin’s discretionary model portfolios, said he also had to sell out.

Mr Cowen said Skandia model portfolio managers have had no choice but to sell out as the platform does not enable soft-closed fund investments, even for investors who are happy to pay the initial charge.

Cofunds also sometimes halts all investments into soft-closed funds, rather than facilitating the initial charges.

Discretionary management firms have launched dozens of model portfolios as a way to compete with asset management groups’ popular multi-manager fund ranges, which can cater for a range of different investor requirements.

Aberdeen and First State have both closed many of their major emerging market and Asia funds, while BlackRock is now planning to soft close Alister Hibbert’s BlackRock European Dynamic fund in November and Fidelity recently soft closed a popular UK small-cap fund.

Steven Richards, associate director for investment management at Thesis, said “the onus has to be on the platforms” to find a way to fix the problem.

Skandia said it does not allow soft-closed fund investments to protect existing investors in the funds. Cofunds was unable to respond at the time of writing.