The effect of soft closures

This year has seen a wave of soft and hard closures of funds, and the past few months have been no different.

At the start of November, Schroders announced it had closed the £367.1m Cazenove Absolute UK Dynamic fund to investments from both new and existing investors. The fund has been hard-closed to protect performance; Schroders hopes to allow the managers, Paul Marriage and John Warren, to run the fund without its size impacting returns.

Elsewhere, Miton has announced it is to soft close its £260m UK Multi Cap Income fund, managed by Gervais Williams. It is to soft close to new investors in the near future, and will be removed from the Novia platform from 29 November. The fund has grown tremendously in size recently; it totalled £184m at the end of September. The firm said it plans to limit the size of the strategy as a whole, which includes other funds such as the £245.5m Diverse Income trust. A relatively new fund, it launched in October 2011, but has had significant inflows thanks to its outperformance.

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Ben Yearsley, head of investment research at Charles Stanley Direct, says soft closing a fund can be both a positive and a negative. It is good that a fund can be limited in size to be able to carry on performing well, he said, but how they close can “be a pain”.

“I would rather they close completely than soft close,” he said. “It is a complete and utter pain.”

It could be argued that these moves are nothing more than clever marketing, he added, stating that when firms give notice the fund will be closing to new clients, maybe investors will want to rush to buy before it closes for good.

“It is a frustrating process but it is done with the best intention,” he said.

Soft closure is often a positive for existing investors in affected funds as management groups are doing their best for them, Mr Yearsley added. He also said that it should never be a major shock when a fund is soft or hard closed as it has to give notice.

However, the way they are closed can be confusing, Mr Yearsley said. Some managers will take the initial charge and investors may end up having 2 per cent taken away, which will lead to complaints. Some funds will say they plan to close at a certain level but never reach the target so will remain open.

The Table shows some of the biggest fund closures this year, for example, the £931m Troy Trojan Income fund, managed by Francis Brooke, which closed at the start of May after the fund attracted more than £450m of investment in just 12 months.