Investment funds that have shrunk by BILLIONS

TWENTY of Britain’s biggest investment funds, many of them once popular with investors and financial advisers, have suffered combined withdrawals of more than £29 billion over the past year as they have fallen massively out of favour.

In some instances, the funds – all multi-billion pound vehicles a year ago – have shrunk in size by more than half as investors have liquidated their holdings and headed for pastures new.

In a limited number of cases, the outflows have combined with a further deterioration in investment performance, forcing the managers to sell assets – often the most liquid – in a falling stock market in order to satisfy investor demand for their cash back. This can lead to a deterioration in the quality of the assets remaining in the fund.

This is exactly what happened at Woodford Equity Income, prompting its suspension in June. It is among the 20 funds that has suffered the most outflows in the past year – even though for two months of the one-year period examined investors could not withdraw their money.

Although all the funds – bar the exception of crisis-hit Woodford Equity Income – are big enough to survive in their current form, and some have reassuringly enjoyed positive investment returns over the past year, investors should (at the very least) be assessing whether their money could be better managed elsewhere.

Rebecca O’Keeffe, head of investment at fund platform Interactive Investor, says: ‘A fund shrinking could be a sign of poor performance, large redemptions or both. Woeful investment management is easy enough to spot but a fund dying a slow death as a result of relentless outflows is harder to identify. Darwinism is alive and kicking in the investment funds industry – the survival of the fittest. Investors must always keep on top of their investments.’

The data on individual fund outflows has been collated for The Mail on Sunday by broker Chelsea Financial Services. It is from figures compiled by scrutineer FE Analytics. The table opposite shows the 20 investment funds that have suffered the largest outflows over the year to the end of July.

In total, 29 funds have suffered investor withdrawals of £500 million or more, although all are overshadowed by the £9.7 billion pulled out of Global Absolute Return Strategies (GARS), a vehicle managed by the Aberdeen Standard investment giant.

In the year to mid-August 2018, the fund, designed to generate positive returns in all kinds of stock markets by investing across a basket of assets, lost money for investors, prompting some big institutions to pull money out. The fund was also hit by key manager departures which met with disapproval from supporting financial advisers.

Despite this severe haemorrhaging of assets, the fund has enjoyed a better last 12 months, generating positive returns. Aymeric Forest, global head of multi-asset investing at Aberdeen Standard Investments, says: ‘Outflows reflect historic per

formance issues from more than a year ago rather than the current situation. Over the last year, the fund’s performance has benefited from the enhancements we’ve made to our investment process and also from a change in the investment environment.’

He adds: ‘With markets increasingly volatile on the back of Brexit, US-China trade tensions and weak global growth, there is an opportunity for a fund such as GARS to re-emphasise the important role it can play in investors’ portfolios over the long-term.’

The GARS fund is not the only big absolute return fund to be hit by major outflows. Funds run by BNY Mellon (Real Return), Invesco (Global Targeted Returns) and Aviva (Multi Strategy Target Return) suffered outflows of £2.9 billion, £1.2 billion and £720 million respectively.

Six of the 20 funds have suffered a double whammy in the past 12 months – massive outflows combined with investor losses. Among them is Woodford Equity Income and three Invesco funds – High Income and Income (both previously managed by Woodford) and Global Targeted Returns.

So, in the case of Invesco High Income, its fund size has shrunk by nearly £ 2.4 billion over the past year. Part of this was a result of investors redeeming holdings worth £1.5 billion. The other £899 million of lost value is a result of the fund’s woeful performance – one year losses of 14.5 per cent.

Invesco Income, managed by the same individual (Mark Barnett), has suffered outflows of £945 million and investment losses of £340 million, resulting in the fund shrinking by 30 per cent.

On Friday, Invesco downplayed the shrinkage in Income and High Income, insisting: ‘The funds have seen a natural steady redemption profile for a number of years – we are not experiencing any unusual increase in redemptions. We will continue to manage the portfolios in line with the stated investment objectives of each fund.’

Jason Hollands, a director of wealth manager Tilney, begs to differ. He says the shrinkage in size of both I nvesco f unds has been prompted by poor investment performance – both appear on its recently published list of so-called ‘dog’ funds. He adds: ‘These funds have had a contrarian positioning in favour of unloved domestically

focused UK companies. That has not been the place to be against the backdrop of Brexit anxieties.’

He also says the two funds’ exposure to Burford Capital – a firm whose share price has slid sharply in recent weeks after questions were raised about its financial health by hedge fund Muddy Waters – has not helped performance.

Some of the funds that have suffered big outflows have been hit with other issues. These include the loss of a longstanding manager, resulting in loyal investors selling up. This is a factor behind the reduction in size of Axa Framlington UK Select Opportunities, following the retirement earlier this year of Nigel Thomas who had run it since 2002. It also explains significant outflows at BNY Mellon Real Return and Schroder US Mid Cap, triggered in part by the retirement of managers Iain Stewart and Jenny Jones.

Interactive’s Rebecca O’Keeffe also believes the ‘wider availability of cheaper and better alternatives’ such as index-tracking funds and exchange traded funds from the likes of Vanguard are a contributory factor. All bar two of the 20 funds with the biggest outflows are actively managed – and O’Keeffe says investors are increasingly shunning these and going in search of ‘better price and performance’.

Darius McDermott is managing director of Chelsea Financial Services, the company that compiled the data for The Mail on Sunday. He says the analysis proves that investors will increasingly ‘walk’ if a fund does not live up to expectation.

He is also reassured by the fact that bar Woodford Equity Income and Janus Henderson Property (suspended in the wake of the 2016 Brexit vote), most of the other 18 funds are not heavily exposed to illiquid assets. This means they have sufficient tradeable holdings – bluechip shares in the case of Invesco Income and High Income – that they can sell if redemptions remain at their current high levels.

Final word goes to O’Keeffe. She says: ‘ Investors should review investments at least twice a year. Traffic light them – green for if things are going well, amber if close attention is required because of performance and red if an underperforming fund has run out of time and it is time to sell.’

Woodford Equity Income would be ‘red’ if not for the fact that it is suspended until at least December.