By Robert Stock The rapid growth of the investment fund industry has led to 39 £1bn plus retail fun...
By Robert Stock
The rapid growth of the investment fund industry has led to 39 £1bn plus retail funds in the UK unit trust and Oeic market and debate about what importance portfolio size should play in IFAs' investment decisions.
The underlying assets of those funds reflects a strong home equity bias in the retail market. Of the total number of £1bn plus funds, 38 are equity or partial equity funds, with 20 devoted to UK equities and UK smaller companies.
The largest retail fund, Merrill Lynch UK Equity, sits at £3.8bn by UK standards it is a huge fund. But by US standards it is mid-sized, as enormous mutual funds are common with the larger ones topping $60bn. Indeed the largest, Vanguard Index 500, has $104bn in assets and there are 106 equity funds with more than $1bn under management.
There are competing views on how UK intermediaries should view the small versus large fund debate, with some professional investors arguing that it is central to the investment case, and others saying that it is secondary to other factors such as management credentials.
John Hatherly, head of global analysis at M&G, which has four £1bn-plus funds, said size must take a back seat as the dispersion of returns, as measured by Standard & Poor's, shows that there is no direct correlation between size and performance.
He said: "The most important considerations must be based on investment process, methodology, the fund manager, and the fund's historic track record. Size isn't really the main consideration. When you are looking to buy a fund, size comes into it but it comes way down the list."
However, the statistics also show that the ranking of the vast majority of the billion-pound plus funds in the UK All Companies sector have slipped significantly between the three year and the 12 month figures with some notable exceptions, including Anthony Bolton's £1.4bn frAA-rated Fidelity Special Situations.
Bambos Hambi, director of global equities at Friends Ivory & Sime, said size plays a central and guiding role in his investment process as size pulls against the factors that made the fund successful, particularly in less liquid markets like smaller companies.
He said: "At the end of the day, if you analyse how these funds have been so successful, it is by not investing in stocks like Microsoft and BT, but by investing in small and medium cap stocks and holding them."
He cites the example of Rory Powe's frAAA-rated Invesco European Growth fund, which reached £3.25bn at its peak earlier this year.
Hambi said: "The size of the fund concerns me a lot because it has made a lot of money in small and medium sized stocks. Its size was the decisive factor in our decision not to invest in it."
Hambi said large fund investment managers could find themselves trapped by a turn of the market, such as the correction in March of technology stocks during which many, and not just £1bn plus funds, found it a long and painful process to reduce their technology positions.
Anna Bowes, savings and investments manager at Chase de Vere Investments, agrees with Hatherly.
She said: "You have to treat each fund on an individual basis. It is true that smaller funds can be far more nimble but a larger fund has got there because it is good."
Like Hatherly, Bowes stressed the importance of IFAs monitoring the changes that take place in a fund as it grows, to see that the management is able to cope with and adapt to the demands of managing an increasingly large pool of assets.
It is possible for a fund, selected for certain characteristics, to grow until it no longer meets the investor's needs.
Bowes said: "Size is just another factor that you have to keep an eye on because it is possible that some funds might not be able to cope with a rapid rise but good fund managers will be able to cope with it."
This is unlikely to happen so fast as to take an IFA by surprise, and when it does happen at speed, such as with the Henderson Global Technology Fund, the story is generally well known. In fact the rapid growth of Hendersons' technology fund was one reason that fund managers Brian Ashford-Russell and Tim Woolley have resigned from the group. They said they could not continue to use their management style in a fund that had grown to have more than a billion in assets under management so rapidly.
The speed of growth is an issue that Paul Talbot, managing director of the fund of funds group Portfolio, said is very important to watch for. However, he said that when looking at larger funds it is very important to consider the credentials of the management group.
He said: "Where size impacts particularly badly for a fund is where they achieve growth very, very quickly and the fund manager has to change his style rapidly to adjust to that."
Portfolio does invest in a number of large funds, holding Powe's Invesco European Growth and Claire Griffiths' Invesco European Smaller Companies in its Portfolio European Fund, as well as Fidelity Special Situations in its Portfolio Fund of Funds and Portfolio Performance Fund.
Talbot has increased confidence in a large fund if the group has a track record in the US and is therefore comfortable with large portfolios.
He said: "In the US Fidelity runs mutual funds that are huge so they are used to running that kind of asset pool. Anthony Bolton and his colleagues spent time in Boston learning to manage big funds."
The research facilities that Bolton has access to, including the number of analysts that feed information into his investment process also enable him to continue to work effectively, Talbot said.
Yet even if fund managers are able to maintain stron
£300bn of liabilities
View from the front row
Transfer from occupational scheme
Appointed by FCA and PSR boards