with isa season demand falling year after year, groups are choosing to close or merge funds with those valued under £10m most at threat
The Isa season is usually characterised by unit trust launches but this year it is being marked by fund closures.
Falling markets have meant smaller portfolios and declining revenues for fund groups. According to Standard & Poor's, the average size of a fund is £117.81m. Of this some 21%, or 355, are under £10m in size.
In addition the growing number of high profile mergers has led to duplication in fund ranges and subsequent streamlining.
The result is that there are now 1,676 unit trusts and Oeics in Standard & Poor's database. Earlier in the millennium the number was closer to 1,800.
Mark Dampier, research director at Hargreaves Lansdown, expects rationalisation will continue.
'There is overcapacity and lack of demand. I can't see demand picking up given we are in the worst bear market for 30 years. Therefore, it is capacity that is going to have to give,' he said.
Although the figure varies according to the type of fund and the fund management resources, Dampier estimates it is generally unprofitable to run a fund of less than £10m in size.
'Running a small fund would be okay if it was just the early stages but if it is unlikely to grow then it is probably not worth persevering with. Fund providers are starting to recognise this, particularly in sectors where there is a lack of demand, ' he said.
Richard Philbin, fund of fund manager at Isis Asset Management, agrees it is inevitable that there will be further fund closures.
'The commercial reality is that in such tough times, groups cannot persevere with small funds and where there is a lack of demand,' he said.
'In such tough times it is an obvious way for groups to cut costs by closing their funds. I would expect any that are below £20m, not performing and in sectors where there is low demand will be cut down.'
He does not believe there are too many funds available to UK investors.
'Look at the US, they have some 10,000 collective investments, it is just that the industry there is more mature than in the UK,' he said.
'The problem is that too many people have money in things like with-profit funds, when it would make more sense to invest in a unit trust that suited their needs.'
Dampier said there are too many funds for investors to choose from and only a small proportion are high quality. Hargreaves Lansdown screens just 200 as potential investments for its clients.
'Unfortunately, some of the poorer performing funds are very large and will not close down as the providers can still make money from them,' he said.
One area that has seen substantial closures is in the technology and telecoms sector, where at least six funds have closed in the past year.
Many groups jumped on the bandwagon during the TMT hype of the late 1990s and early 2000. After the bursting of the bubble these funds have failed to deliver returns to investors or profits to fund groups.
Funds that no longer exist include Solus Technology Plus, Lloyd George Global Information Merrill Lynch Digital Europe, Govett European Technology, Premier Technology and Close FTSE eTX. Most of these funds were around the £5m-£15m mark at time of closure.
The most high profile fund deal now taking place is that between New Star and Aberdeen.
New Star is to take on the management of Aberdeen fixed interest funds but has said it has no plans to merge them with its own bond portfolios.
New Star already offers a High Yield fund, run by James Gledhill, and plans to launch an investment grade fund, to be managed by Theo Zemek. Aberdeen funds purchased include Fixed Interest, High Yield, and Sterling Bond.
However, New Star has also bought Aberdeen Equity Income, which could well be rolled into Toby Thompson's Higher Income fund.
Old Mutual is to merge 12 Old Mutual and five Gerrard funds as part of a rationalisation. The group plans to reduce its range of 47 funds down to 25. Included in that rationalisation will be the merger of four European unit trusts into one fund called Old Mutual European Equity.
The group also intends to pull together its Hong Kong and China, Thailand and Asian trusts into one broad based Asian portfolio, to be called Old Mutual Asian Select.
Other products to be merged include the Latin American Companies and the Old Mutual International Managed Pep Trust into the Old Mutual Worldwide Trust, which will be renamed the Worldwide Select Equity fund.
Meanwhile, the Old Mutual UK Growth Trust and OM Gerrard UK Growth fund will be merged into the OM Gerrard UK Opportunities Fund, which will be renamed Old Mutual UK Select Equity.
Isis Asset Management, the company formed through the merger of Friends Ivory & Sime and Royal & SunAlliance, is to reduce its fund range to eliminate duplication. Isis marketing director William Russell said the existing range of 55 funds will be concentrated down to 30-35 in July and August.
He said most mergers will occur where there are obvious areas of duplication. For example, the former Royal & SunAlliance UK Prime and FIS UK Dynamic fund will be merged into a single entity, managed by Mike Felton.
The merger of Artemis and ABN Amro has led to duplication in the fund range so a number of mergers are planned, taking effect on 21 February.
ABN Amro Equity Income will be rolled into the Artemis Income Fund, to be managed by Adrian Frost. ABN Amro UK Select Opportunities is to be blended into the Artemis UK Special Situations fund and managed by Derek Stuart. ABN Amro Pan Europe will be merged into the Artemis European Growth Fund, run by Philip Wolstencroft. This action should reduce the number of funds from 12 to nine.
Gartmore intends to cut back its retail range from 34 to 27 on 15 May. Among changes, it plans to roll the UK Income and UK Growth & Income portfolios, both managed by Brian Gallagher, into Gartmore UK Equity Income. The new portfolio will be managed by Christ Burvill, with Gallagher playing a supporting role.
In addition, the Gartmore UK Smaller Companies, UK Techtornado and UK & Irish Smaller Companies products are to be merged into one UK & Irish Smaller Companies fund. Global Utilities and Global Growth will be blended to create a new fund called Gartmore Global Opportunities.
The Japan Focus fund will be rolled into the Japan Growth fund and the latter name is to be retained. The Extra Income fund will be merged into the Corporate bond fund, the name of which is to be retained Meanwhile, the High Yield Corporate Bond fund will be merged into Monthly Income, with the latter retaining its name.
Britannic Asset Management is to close two of its sector funds, the £3m Global Resources and £3m Financials on 28 February.
Unitholders in the affected funds can opt to either encash their investments in the portfolios or take a free switch into another Britannic fund. These funds were part of a group of four sector funds launched by Britannic in January 2001. The other two, Global Technology and Healthcare, remain.
Stephen Hall, manager of the £3m Global Resources portfolio is also a member of the Japan team and will continue in that role. The Financials portfolio has been jointly managed by Far East manager Diamond Lee and European manager Andrew Killean, both of whom will continue in their other roles.
Solus is to merge its £6.4m Sterling Corporate Bond and £22.8m High Yield funds and rename it the Sterling Bond fund. This takes place as part of the group's conversion of its unit trust range to Oeics, which is to occur on 17 February. Kevin Doran manages all the fixed interest portfolios and will continue as manager of the merged product.
In June 2002, Solus merged its Technology Plus fund into £25.8m UK Special Situations, managed by Nick Greenwood.
Edinburgh Portfolio is to close its £200,000 Japanese fund of funds as it is too small to be commercially viable. Edinburgh Japan Portfolio was around £400,000 in size when it was acquired from Wise Speak four years ago as one of number of country specific fund of funds.
With Japan remaining out of favour with UK investors Edinburgh Portfolio feels further growth in the sector looks unlikely.
The Scottish Widows range was reduced from 74 unit trusts to 40 Oeics during the course of last year.
The rationalisation took part in three stages, starting in July last year, followed by September and November. Much of the duplication was a result of three fund ranges coming together, those of Abbey Life, Hill Samuel and Scottish Widows.
Among funds rationalised were the Corporate Bond, High Interest and Premier Income funds which became the one £1.35bn Corporate Bond fund. Smaller Companies, Smaller Companies and Recovery and UK Smaller Companies were merged into a single £201m UK Smaller Companies fund. The Balanced, UK Equity Growth and Millennium funds were rolled together to create the £1.88bn UK Growth. Abbey Global Opportunities and Abbey International were merged into the £341m Scottish Widows Global Growth and International Income was merged into the now £63.6m International Bond, to name a few.
Close Fund Management shut down its FTSE4Good UK fund on 22 January, less than three years after launch, following a lack of investor interest and a run of poor performance.
The fund, which tracks the FTSE4Good index, raised around £3m at launch in August 2001, but has since shrunk to less than £1m.
Marc Gordon, managing director of Close, said poor interest and redemptions were prompted by a lack of interest in stock market investment in general. Close also closed its FTSE eTX fund earlier in the year.
Aegon has closed eight of its retail funds in a streamlining exercise. These are the £12.1m American Smaller Companies, £37.6m European Smaller Companies, £84m Far East, £8.6m Japan, £6m Latin America, £6.2m Cash, £3,9m 100 Index Tracker and £9.9m Socially Responsible Equity funds.
The closures, which reduces Aegon's range from 23 funds to 15, took effect from 31 January. Investors were offered free transfers to other Aegon funds or their cash back.
Merrill Lynch closed down four of its specialist index tracking funds last November. These included the US Equity, Continental European, Pacific ex Japan and Japanese equity trackers.
Nigel Webb, communications director at Merrill Lynch said the funds did not have the critical mass and so it was not viable to continue running them. In March, 2002 Merrill Lynch merged its Digital Europe fund into the Merrill Lynch European Dynamic fund.
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