Third of funds run risk of closure due to lack of interest

Third of funds run risk of closure due to lack of interest
 UK-domiciled active funds by size

A third of funds with a track record of three years or more have failed to gather £50m in assets, new figures show, suggesting a significant chunk of the UK fund universe is at risk of closure.

Data provided to Investment Adviser by Thomson Reuters Lipper shows that 31 per cent of open-ended, UK-domiciled funds in existence for three years or longer are yet to breach the £50m threshold.

The products, which represent just 1.5 per cent of the universe in terms of assets, face an uncertain future at a time when asset manager consolidation, fee pressure and some intermediaries’ inability to invest in smaller funds are leading providers to review their ranges.

“The regulator puts pressure on [fund houses] to show appropriate research and that there’s demand, but a lot of these funds are failing to raise assets in their first three years,” said Rob Burdett, co-head of F&C’s multi-manager team.

“If mergers continue we will see an increase in closures. The other aspect that might accelerate [it] is the increasing focus on cost.”

The annual rate of fund closures has stayed within a steady range over the past decade, other than a spike at the peak of the financial crash, according to separate figures from Lipper. 

Almost 320 funds have been closed in the past two years, slightly above the decade average of 140 per year. Buyers expect a further increase in future.

Tom Delic, a manager at Seneca, said: “The growth in passives and exchange-traded funds is putting a lot of pressure on funds that aren’t truly actively managed. The rate of closures might accelerate.”

The three-year time period is critical because many fund selectors still require evidence of a track record before they commit to a product. Funds that have yet to achieve critical mass beyond this time frame are less likely to ever do so.

The minimum viable fund size has also been increasing as a result of the new breed of fund selectors who control increasingly large pools of assets.

The size of these asset bases means minimum investment levels must also rise: even a top-performing fund would provide little benefit to an asset allocator if it accounted for less than 1 per cent of their portfolio.

More funds could be at risk if these thresholds continue to increase. The proportion of three-year-old vehicles with less than £100m in assets is 45 per cent, according to Lipper.

One hope for smaller products may be the increasing awareness of the need for differentiation.

“As a rule of thumb, we would [only] consider a fund once it’s above £50m,” said Jamie Fletcher, part of the Sarasin & Partners third-party funds team.

“We are pragmatic about this and believe that being able to look at small, younger funds is something of a competitive advantage. 

“However, we would need to have a lot of conviction in the manager’s ability to attract assets.”