For many fund buyers, the question of whether to place capital in a fund starts with whether they can invest in it, before assessing the investment case.
That is because many wealth managers and discretionary fund managers run large pots of assets and so are unable to invest in very small funds, as they would own too much of the total fund, and have a potential liquidity problem if they try to leave.
Conversely, many fund buyers are wary of investing in funds that have grown to a very large size on the basis that the fund manager may not be able to replicate the past performance when they have more cash to manage.
<The problem with a very small fund is the manager will always be worrying about their job --- Charlie Parker, Albemarle Street Partners
However, there are issues with small funds as well, according to Charlie Parker, managing director at Abermarle Street Partners.
Mr Parker says: “The problem with a very small fund is the manager will always be worrying about their job, as if they are not bringing in enough revenue then changes would be made.
"That is likely to distract them from the task of managing the money, while there is also the risk that they will try to generate a strong burst of short term performance to keep their job but that isn’t reflected in the long-term.”
Problems with a fund getting too big
Shane Balkham, chief investment officer at Beaufort, says the notion that a fund can get too big in size is “something that is absolutely critical to how we manage money.
"We think every fund should have an element of capacity, and that the fund manager should know what that is. And we would ask them that question, how big can their fund get without performance being affected?
"And if later on they breach that capacity and get much bigger, that is a major no-no for us.
"I remember with the New Star Property Fund, the manager told us he would only invest in London property, then we saw him six months later, and his presentation was about all of the opportunities outside of London.
"When we asked him about it he told us his process had changed.
"I think you could say that the GARS [Standard Life Global Absolute Return Strategy] and Richard Woolnough's M&G Optimal Income fund got too big and performance suffered.”
The GARS fund has shrunk in size from £20bn in February 2018, to £4.2bn in March 2020.
The fund has lost clients 0.7 per cent over the past five years. In November 2018, Aymeric Forrest was appointed fund manager.
The M&G Optimal Income fund supplanted GARS at one stage to be the largest fund in the UK retail market with assets of over £20bn.
It subsequently split into two funds, managed in the same way, with one for European clients and the other for those in the UK.