InvestmentsApr 2 2020

Does the size of a fund matter?

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Does the size of a fund matter?

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. 

The UK version of the fund is now £3bn in size and has lost investors over 1 per cent during the past five years.

Darius McDermott, managing director of Chelsea Financial Services, says one of the questions he always asks the managers with whom he is invested is: how big their fund can grow.  

Mr Potter says the problem is not always simply with the size of the fund, but with how much work the fund manager is doing.

He says: “You could have a fund that isn't very big, but the manager could also be running a lot of money for institutional clients on other funds.”

In contrast, he does not think a fund can be too small, and frequently provides the seed capital for new funds.

Tom Sparke, Investment director at GDIM, says practical constraints can also make a fund too large for him to invest in.

He says: “We cannot own more than 20 per cent  of any single fund so the smaller the fund, the smaller the stake we can take in a portfolio.”

Asset class is important

He also takes the view that a fund can be too large, saying the importance of this consideration depends on the asset class, with more scope to invest in larger funds in areas such as global equities, while it is more important to him with funds investing in less liquid areas such as bond funds.  

Ben Yearsley, investment director at Fairview, says he generally wants a fund to be within the £50m-£100m range as a minimum, as very small funds often have “prohibitive” costs which make it a less attractive investment.

Ben Willis, who runs the model portfolio service at advice firm Chase De Vere, says he generally would not invest client money into a fund that was less than £100m in size for liquidity reasons.

Mr Willis says the problem would be if he owned too much of a fund, and then wanted to withdraw the money, how easily could this be done with a fund with assets of less than £100m. 

Mr Yearsley adds that in the past he has sold funds, particularly smaller companies equity mandates, that he feared had got too large. 

Ben Seager-Scott, head of multi-asset funds at Tilney, says: “If a fund is too large, then it may not be able to trade effectively in some of the best opportunities that it may have been able to access whilst smaller.

"However, I don’t think this is a question of a ‘pounds and pence’ figure, but rather the size of the fund relative to the market and the impact of liquidity and turnover – clearly a global large-cap manager can manage a larger fund than a UK micro-cap manager.

"I think the key is to assess liquidity and ask the fund manager, ideally when the fund is new and very small, how much they believe (based on evidence) they can reasonable run in the strategy.”

david.thorpe@ft.com