Simon Evan-Cook, investment manager of multi-asset funds at Premier Asset Management, discusses fund size and asks: can a fund become too big for its asset class?
The subject of fund size, particularly in respect of less-liquid assets, is one that has grown in prominence in recent months. Much of this is down to the Financial Services Authority focusing its spotlight on the issue.
It started with the more-esoteric life settlements industry, but more recently has turned to the mainstream world of corporate bonds. It is a potential problem that is worth highlighting, even if the act of highlighting can itself cause the very problem you set out to solve.
Fund size and liquidity is something we take very seriously, and always have done. For one, getting caught in an illiquid asset class when the herd decides it is time to bail out could incur permanent losses for our investors – something that, needless to say, we are keen to avoid.
When it comes to funds, how big is too big?
This is why we assess the investment vehicle as well as the assets it holds as there are investments for which an open-ended structure is simply inappropriate given the potential for liquidity to evaporate.
For the same reason, it is crucial to avoid funds that have grown too big for their asset class, as they too can leave you low and dry.
But in addition to the worst-case scenarios, there are more commonplace bad-case scenarios to consider.
Managers running huge funds, even in relatively liquid asset classes, often have to change the way they manage that fund as it grows – and you tinker with a successful process at your own peril (not at our investors’, thank you very much).
In corporate bond funds, we have recently heard of some behemoths forced to move from holding 80-90 individual line items to more than five times that amount.
That makes an investment process less about identifying individually mispriced opportunities, and more about attempting to catch the macroeconomic tailwinds. That is devilishly hard to do on a consistent basis.
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