PA ANALYSIS: Is it time to clear out the clutter of small funds?

Added 10th August 2017

Small and expensive, are funds that have failed to hit £10m in assets just clogging up the investment universe?

PA ANALYSIS: Is it time to clear out the clutter of small funds?

In the investment world, a fund of less than £10m is an “especially small” proposition and a mere drop in the ocean compared with the near £10bn held in Neil Woodford’s flagship equity income fund.

Nonetheless there are currently 121 UK funds classified by the Investment Association with less than £10m in assets, the vast majority of which don't have the excuse of being new to the game. 

Only seven of the smaller funds listed were launched in 2014 and just one is in its first year.

Amazingly, 15 of the funds listed were launched prior to the turn of the century.

For funds such as Standard Life TM Pacific Basin, launched in 1986 and with only £1.3m in assets, or the GAM MP UK Equity fund launched in 1999 with a similar amount, there is a case to be made that the fund world would be simpler without them.

Small funds end up being a big burden on underlying investors and at that size I think ultimately investors are being done disservice

Ryan Hughes, head of fund selection at AJ Bell, says: “Some of these funds will be new and growing, which is fine, but some others have been around for a long time.

"They will typically have high costs so investors end up being in smaller funds that are not growing and are paying for the privilege.”

He supports a move this week by Neptune Investment Management to apply to the FCA to close its US Mid Cap Fund just one year on from its launch, adding it is better for investors if the decision to close smaller funds is made quickly.

In the case of the Neptune fund, it managed to accrue just £500,000 in its first, and now only, year in operation.

The Neptune Global Income, Global Smaller Companies and Quarterly Income funds also seem to have struggled to build up an asset base, with just £6.9m, £1m and £6.4m in assets respectively.

While all three remain active, in a statement confirming the US Mid Cap fund closure Neptune said it “regularly reviews its fund range to ensure it meets the requirements of investors”.

Morningstar’s director of manager research ratings Jonathan Miller, says it would be easier if more of the small funds plodding along shut up shop.

“Under £10m is especially small. You will find that fees tend to be quite high too. There will be a management fee. Just because the fund is small it doesn’t mean the charge will be smaller,” Miller says.

He adds: “They end up being a big burden on underlying investors and at that size I think ultimately investors are being done disservice.”

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About Author

Louise Hill

Senior Reporter

Louise joined Portfolio Adviser in December 2016 as one of the editorial team’s news reporters based in London. Originally from Liverpool, she is an NCTJ-qualified journalist and began her career in 2014 working on local newspapers.



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