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A thousand cuts

As the pressure on asset managers’ product ranges ratchets up, new data provides the first real evidence that the fat really is being trimmed from the famously bloated funds universe. 

There’s much speculation that value for money assessments might accelerate the rate of closures and mergers in the industry. But the commercial pressures have been real for much longer. Fund firms know that launching new products is difficult, and funds holding less than £50m-£100m are increasingly seen as unviable.

This supply and demand equation has left sub-scale, established products looking vulnerable - and many are starting to fall by the wayside. Three years ago, figures from Refinitiv (then Lipper) showed that 41 per cent of funds with a three-year track record were under £100m in size, and 31 per cent were under £50m.

New figures from the data provider show those proportions have fallen markedly since then, as the chart below shows:

That implies that either funds have been closed en masse - or there’s been a sudden surge in assets for sub-scale funds, coupled with newer funds proving more successful at breaching the £100m mark prior to their third birthdays. 

As it happens, separate figures provided to Ignites Europe do show that the proportion of funds being shut across Europe rose markedly in 2019.  

There’s a long way to go for the industry: there are still more than 800 UK-domiciled funds that have been around for three years or more but failed to reach the £100m mark. But this data does suggest things are finally starting to change - and the rise of the big DFM has certainly had a role to play in that.

Dealing in absolutes

Is it all over for absolute return funds? Multi-asset absolute return funds, to be accurate. The question's not new, but it becomes more relevant with every additional month of outflows.

Sentiment towards the asset class has taken a battering over the past 18 months following a series of drawdowns that shook buyers’ faith. Wealth managers were among those who abandoned the sector in their droves as a result.      

It’s always tough for fund providers to counter a sudden shift in sentiment - but there’s an argument it’s harder still when it comes to absolute return.

To the blessed relief of most investors, market slumps have been few and far between in recent times. But that just means the stakes are that much higher when these episodes do occur.

Many selectors are effectively operating a one-strike-and-out policy: prove yourself incapable of protecting on the downside, and that’s it. After all, another opportunity for funds to prove their worth in the same conditions may not materialise until months, or even years, later.

That's why outflows can be hard to stop, even after performance graphs start looking healthier. Gars is a case in point - but seen from this perspective, its much-discussed travails look less like an isolated incident and more like a harbinger of things to come for the sector. 

With markets on the up again, few would expect mass inflows into absolute return. Yet that's exactly what happened in 2017-18 as investors fretted about the future. There’s no such activity evident nowadays: just two absolute return funds took in £20m or more in January, per Morningstar figures. Providers will be aware the next drawdown may be their last chance to show they have what it takes.

Coming out swinging

One asset class that has almost certainly had its day is open-ended physical property funds. Their problems, clearly, stem from liquidity mismatches. But there’s been a dollop of bad luck in there, too. M&G Property’s suspension late last year increasingly looks like a case of bad timing - in that this particular gating could've been avoided if the fund had held on for another few weeks. 

True, net outflows from the sector have continued since the general election result improved the fortunes of other domestic assets. But that may be down to the adverse publicity generated by M&G’s move. At a portfolio level, there are signs of improvement emerging. BMO has switched its fund back to offer pricing, suggesting conditions have become altogether healthier. That's come too late to save the sector’s reputation. But it does suggest no further suspensions are on the way.