EquitiesJun 16 2014

Red flag funds: The 40 at risk of closure

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This is only the second time since Investment Adviser’s red flag list of funds was introduced in 2010 that there has been a reduction.

The list – using data from FE Analytics and based on the metric explained on this page – also shows more funds have made the list for two years in a row, with 32 funds appearing as ‘red flags’ in both 2013 and 2014, compared to just 18 funds last year and in 2012.

Among them is the £6m Jupiter Global Ecology Growth fund, previously known as the Jupiter Climate Change Solutions fund. While its name has changed, the investment process remains the same, with manager Charlie Thomas using an approach that mirrors the much larger Jupiter Ecology fund launched more than 25 years ago.

Meanwhile, the £5.2m VT Maven Smart Dividend UK fund has also been renamed from the Munro UK Dividend fund. Fund manager Robert Davies notes: “Quantitative easing has distorted investment returns by favouring small- and mid-cap stocks at the expense of large blue-chip dividend payers, which this fund has a bias to.”

Darius McDermott, managing director of Chelsea Financial Services, claims red flag funds fall into two categories. The first are adviser-based funds, which aren’t really targeted at retail investors. He suggests these may have more of a reason to stay open, as gathering large amounts of assets won’t have been the intention.

Then there are those that belong to larger houses, where they have the distribution capability but haven’t been successful. “This may be because the strategy isn’t appealing, there has been a lack of focus on the fund, or simply because performance has been disappointing.”

But Mr McDermott argues these funds should be merged or closed. “They have had ample opportunity to gather and retain assets and there really isn’t a stylistic excuse for consistently poor performance, as we’ve seen many different market conditions during the past five years or so.”

The £9.6m Marlborough European fund has cropped up for the past three years, while Marlborough’s North American and Emerging Markets funds have been identified as ‘red flags’ in 2013 and 2014.

A spokesman for Marlborough Fund Managers says: “We took over these three funds just under four years ago and since then new managers have been appointed and performance has improved significantly.”

Funds with under £10m in assets under management can result in higher charges for investors. “Investors in funds less than £10m in size will be paying disproportionately high charges which, when added to poor performance, is a recipe for disaster,” says Danny Cox, head of financial planning at Hargreaves Lansdown.

Ben Willis, head of research at Whitechurch Securities, agrees: “I believe one of the main reasons these funds remain open is that they are still commercially viable. Some of this can be attributed to investor apathy.”

Neptune has two funds that have made the list for two consecutive years. The Neptune Cautious Managed portfolio is one of the smallest funds on this year’s list at £1.3m and the Neptune Global Special Situations is not much larger at £2.4m in size. The fund house, however, says that it regularly reviews its funds.

Elsewhere, the SVM Global Opportunities fund is currently under review at the time of writing due to its consistent underperformance. Swip also notes that the future and strategy of the £7.2m Swip Absolute Return Macro fund is “under review”.

James Aber, a spokesman for MFS Investment Management, who is on the list with the £5.5m MFS Meridian Japan Equity, notes: “With our focus on high-quality stocks, this fund has tended to outperform in challenging market environments and lag during strong equity rallies. Since late 2012, the Japanese equity market experienced a strong rally largely driven by monetary stimulus and a depreciation of the Japanese yen. We believe the portfolio remains well positioned to add value over the long term.”

The UBS UK Equity Income fund was identified as a red flag for the first time this year but UBS Global Asset Management has been quick to rectify any underperformance. It confirmed that Steven Magill took over as manager on April 29 2013, with the fund outperforming its FTSE All-Share benchmark index by 4 per cent, to May 31 2014, according to UBS.

The question is whether in this current period of low volatility across markets, funds that are already struggling to find returns can actually outperform.

Ellie Duncan is deputy features editor at Investment Adviser

RED FLAG FUNDS

METHODOLOGY

Investment Adviser sought to identify ‘red flag funds’ – those vehicles that could face imminent pressure to be closed or merged with a sister fund – across the IMA sectors using data from FE Analytics and the following metric:

– The fund must have been launched in 2008 or earlier (and therefore have been through a full business cycle)

– It must currently have less than £10m in assets under management

– It must have ranked in the third or fourth quartile of its peer group in terms of its performance in a five-year period

RED FLAG FUNDS: The 32 that made the list in 2013 and 2014

FundSize (£m)OCF1 Year3 Year5 Year
Axa - Sterling Gilt7.81.2-2.0110.820.37
Barmac - The Castleton Growth6.93.411.6410.723.7
CF - Lacomp World4.73.17-7.92-8.6918.05
CF - Zenith St Andrews5.32.25.5921.7358.57
CF KB- Ramogen9.91.19-0.185.7310.83
Cler Med - FTSE 100 Tracker8.915.0125.4180.01
Cler Med - Income9.81-0.117.3950.34
EFA - New Horizon Growth5.22.213.5411.4239.1
Elite Hurlingham Managed Growth6-116.1953.23
Elite - Income Plan Cash1.40.43-0.120.360.64
Jupiter - Global Ecology Growth628.5121.2858.8
Legg Mason - Continental European Equity7.51.9511.7421.6160.51
Margetts - Greystone Conservative3.72.2-0.219.1510.94
Marlborough - Emerging Markets7.12.03-7.9-13.0532.33
Marlborough - European9.61.9712.4222.9363.49
Marlborough - North American9.41.781.6438.8990.36
MFM - Techinvest Special Situations4.41.8632.7850.5694.33
MFS Meridian - Japan Equity5.42.05-5.3919.8326.67
Neptune - Cautious Managed1.32.163.1414.9217.13
Neptune - Global Special Situations2.42.77-9.31-3.9339.56
Oceanic - Australian Natural Resources3.32.77-17.71-55.85-11.14
Premier - ConBrio UK Smaller Companies5.53.4123.2941.03132.45
Rothschild - RPFM BPM Trust9.71.3-3.2518.7252.08
S&W Deucalion7.3-4.7422.6254.61
SF - Delmore Growth & Income3.32.229.6622.5790.53
SF - Webb Capital Smaller Companies Growth4.32.811.69-59.34-37.37
SVM - Global Opportunities3.62.09-11.54-31.03-16.45
Swip - Absolute Return Macro7.21.850.49-12.02-15.25
T Bailey Fund Mgrs (ACD) - Discovery Managed Growth3.33.042.1617.9553.58
Threadneedle - Worldwide Select2.72.390.2716.3255.71
UBS - UK Equity Income3.71.739.3734.2672.72
VT Maven Smart Dividend UK5.21.155.4825.771.53

Source: FE Analytics/Investment Adviser

Red Flag funds in numbers

8 - Number of funds that have appeared three years running

18 - Decrease in number of red flag funds from 2013

32 - Number of funds still on the red flag list from 2013

40 - Number of red flag funds this year

105 - Number of funds closed during 2013

126 - Number of launches in 2013