Red flag funds: The 40 at risk of closure

This article is part of
Summer Investment Monitor - June 2014

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.

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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.