Red flag numbers remain consistent

This article is part of
Summer Investment Monitor - June 2015

The number of ‘red flag’ funds that appear to be at risk of being closed or merged has remained at 40 for the second consecutive year.

This is the first time since the research began in 2010 that the number of funds has remained unchanged and follows two years of declines. However, while the overall number is unaffected, the list – using data from FE Analytics – reveals the number of funds that have appeared for two or more years has fallen to 23 compared with 32 last year.

From the 2014 list, eight funds have closed or merged, including the Legg Mason Continental European Equity and Threadneedle Worldwide Select funds.

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Juliet Schooling Latter, director of research at Chelsea Financial Services, notes: “The costs of running such small funds are quite considerable and, as they are not performing well, they are unlikely to attract any more assets.”

Ben Willis, head of research at Whitechurch Securities, adds: “Investors generally vote with their feet. If you aren’t delivering, they walk away. However, there is no onus on a fund provider to close a fund in spite of its ‘inefficient’ size and poor performance. Because of investor apathy, there is no pressure on fund providers to close them.”

Some funds on the list have seen improvements that have not yet filtered into the five-year performance or fund size. The Discovery Managed Growth fund has seen changes in both manager and authorised corporate director in the past five years.

In December 2014, the vehicle and its sister, the Balanced fund, were acquired by Harwood Multi-Manager. Richard Philbin, chief investment officer at Harwood, explains: “[Having] a range of funds is central and core to our process. We are looking to potentially launch a new fund to go with [the Discovery Managed Growth fund], so it is part of a suite. But we have to bed it down, change the processes to our processes, and build the assets.”

Neptune has the most funds on the list with its Cautious Managed and Global Situations making appearances for the third consecutive year, while its Emerging Markets fund makes its debut.

A spokesperson for Neptune says: “We continually review our fund range as part of our product governance regime designed to ensure that our product offering is focused, reflects the requirements of investors and also fully expresses the diverse investment capabilities of our team.”

Marlborough, meanwhile, has seen the number of its funds on the list fall from three in 2014 to just one, its Emerging Markets fund. On the fate of this vehicle, a spokesman for Marlborough Fund Managers says: “A new investment management team was appointed a little over two years ago and the fund is ahead of the sector average over one year.”

Also on the list is the VT Maven Smart Dividend UK fund, managed by Robert Davies. It is a smart beta tracker focusing on value and dividend-paying stocks. But its style has been out of favour in recent years and, combined with the distorting effect of quantitative easing, the fund has struggled. “We have a bias towards large caps but we have lower volatility and one of the highest yields in the sector at 4.1 per cent,” says Mr Davies.