Investors are frequently told they should a) always look to the long-term; and b) they should not put their money into the stock market unless they are willing to leave it there for at least five or 10 years. But what happens when a fund you had backed as a long-term winner suddenly closes?

Number-crunching by analysts at data provider Morningstar reveals just how short-term an affair investing in funds can be. At the start of 2008, there were 2,500 UK-domiciled funds. Incredibly, over the past decade, 1,500 of those have been closed.

Over that 10-year period, a further 2,000 new funds have been launched. That means, despite the fact that 60% of the funds available to investors in 2008 no longer exist, overall there are actually 440 more funds in existence today.

Even more baffling is that these figures don’t even take into account investment trusts, overseas funds that UK investors can access, and the thousands upon thousands of ETFs on the market.

Morningstar analyst Jonathan Miller says: ‘Keeping track of investments can be tricky when you consider the extent to which funds come and go. Granted the investment industry has evolved over time, but the rate of launches amounts to four new funds every working week – that’s simply too many.’

WHY DOES A FUND CLOSE?

There are many reasons that investment groups will choose to wind down funds: poor performance is perhaps the most obvious, others have too little money invested in them to make them viable, or sometimes a fund house decides to merge funds together when their mandates are similar.

Other closures may be driven as a particular asset, region or trend falls out of favour, or when a manager leaves the company.

Ben Yearsley, director at Shore Financial Planning, points out that a spate of investment house mergers in recent years may also have contributed to fund closures. Janus merging with Henderson and Standard Life merging with Aberdeen Asset Management are just two high-profile examples, where there is likely to be overlap of fund mandates as the groups complete their integration.

The fact the data period includes the worst of the financial crisis may also help to explain why the closure rate has been so high. But Yearsley adds: ‘Fund closures seem to have been occurring at a more stable pace in the last few years but there are still too many new launches.’

Investment group Columbia Threadneedle says it reviews funds on an ongoing basis ‘to identify any situations where we need to rationalise, such as when a fund could be a duplicate of another fund, is sub-scale and may suffer from high running costs, or has ceased to be relevant to clients’.

Depending on the situation, a fund may be closed, merged with another or converted into a new strategy.

Yearsley adds: ‘When new funds don’t reach critical mass, often the best thing for the investment house to do is to close or merge them. It’s a shame, as I’m a fan of new launches as long as the manager has a good pedigree, particularly as smaller funds can be more nimble and often do very well, but reaching that critical mass can be difficult.’

EXAMPLES OF RECENT MERGERS OR CLOSURES

This summer, for example, Rathbones Investment Management revealed it was to merge its Blue Chip Income and Growth fund into its Income fund.

The Blue Chip fund had been around since 1989 but had assets under management of just £71m, meanwhile the Income fund runs more than £1.3bn of investors’ money.

Rathbones says the two funds follow the same investment process and have broadly similar objectives, adding that the Blue Chip fund has ‘failed to resonate with investors’.

Mike Webb, chief executive at Rathbones Investment Management, says: ‘Rathbones has always taken a pragmatic approach to its offering and regularly reviews its funds to ensure they meet the requirements of investors.’

WHAT ARE THE CHOICES FOR INVESTORS WHEN A FUND CLOSES?

When a change such as this occurs, investors are notified and usually given a range of options as to what they want to do. This will typically include the choice of rolling their money into the merged product or, if there is no merger, to move their units into a different fund from the group’s range, or simply redeeming their investment and moving their money elsewhere.

In another example, this summer fund group GAM liquidated a range of nine bond funds, including GAM Absolute Return Bond and GAM Star Dynamic Global Bond, which were run by a manager who was suspended amid concerns around due diligence and record keeping. Money invested in the funds was returned to investors.

Miller at Morningstar adds: ‘Investors should monitor any communication from fund groups or platforms to keep abreast of any changes taking place. These shouldn’t be treated as junk mail or spam.’ (HB)

‹ Previous2018-10-25Next ›