The Daily Telegraph - Saturday - Money
Closing bell: five funds to buy while you still can
Funds may close to new investors if they become too large. Jonathan Jones finds out which are preparing to shut their doors
The size of funds should be a chief concern for investors, as the more money managers take in, the smaller the pool of stocks they can hold. This is because, in order to keep the same balance of investments, they would need to increase their investments equally across their portfolio. Yet there is a limit to how much of a company one shareholder can own without having to put in a bid for acquisition.
Larger funds are therefore less able to invest in smaller companies, forcing managers to buy bigger firms that are unlikely to offer the same potential levels of return.
As a result, when funds get too large, their performance can suffer. Some asset management companies choose to shut the doors of their funds at a certain size, meaning no more money can enter the fund.
Another option is to “soft-close”, where existing investors can continue to put money into the fund. This is more popular and is achieved by stopping all advertising of the fund and charging a very high initial fee to new investors as a deterrent.
Ben Gutteridge, of Brewin Dolphin, a wealth manager, said: “We welcome fund closures as this protects existing investors from a deterioration in performance.”
Last year savers outperformed investors as most major stock markets lost money. A consequence of this was that funds also saw their assets under management reduce. This means the pressure has eased off for some funds that were reaching capacity and about to shut their doors.
There is no guarantee, however, that they will not choose to close as they recover. With Isa season fast approaching, there are a number of funds that investors can look to buy now after a year of losses before they think about barring new money.
One fund that could be in line to close in the near future is Polar Capital UK Value Opportunities, which has already raised £816m since launching in 2017. It is managed by George Godber and Georgina Hamilton, who were in charge of the Miton UK Value Opportunities fund from 2013 to 2017 before making the switch to Polar Capital. That fund had a limit of £1.2bn and Telegraph Money understands they have a similar cap at their current fund, meaning it would hit its ceiling before long if it maintained its current growth rate.
Chris Rush, of investment firm Iboss Asset Management, said he thought these managers were likely contenders to close soon based on their history.
“Their approach to capacity and the problems faced by larger funds has remained consistent over many years, despite frequent opportunity to take in more money,” he said.
The managers are known for their strict investing philosophy, which does not discriminate based on a company’s size. This could lead it into problems if it grew too big.
Another investment firm with an eye on capacity is Merian Asset Management (formerly Old Mutual before a buyout led by fund manager Richard Buxton last year).
Merian UK Dynamic is managed by Luke Kerr and is unusual as it has a “limited issue”, which caps the amount that can be sold to investors at £507m. It currently holds £471m, giving it £36m of spare capacity. It has reached its limit and had to shut up shop before, and has neared this level in recent years, though last year’s falls have eased this slightly.
James Calder, of City Asset Management, a fund house, suggested investors would be wise to buy the its £10.1bn level reached in 2016.
Stewart Investors has had to shut some of its funds in the past due to capacity. Though this one is billions away from its limit, a reversal of fortunes in Asia could mean it fills up quickly.
David Gait and Sashi Reddy, its managers, target companies in Asia Pacific that offer predictable earnings growth and operate in countries with growing economies. This is a longterm approach that results in fewer trades than the average fund.
Adrian Lowcock, of Willis Owen, a broker, said: “With China and Asia having suffered in 2018 the pressure to close the funds is likely to be off at the moment but a change in sentiment would see money flow in, quickly causing the situation to change.”
‘The situation can change quickly if sentiment shifts and money flows in’