Investment managers warned not to freeze out investors

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INVESTORS have been urged not to panic amid fears that more firms could move to freeze people out of their most popular funds.

A flurry of so-called “soft closures” in recent weeks has triggered concerns over the choice available to investors in some sectors and possible liquidity problems in bond funds in particular.

Aberdeen Asset Management has revealed that it is levying a new charge on three of its biggest emerging markets funds in a bid to slow the amount of money going into them, effectively “soft closing” the products.

From 11 March it is to impose a 2 per cent initial charge on the Emerging Markets, Global Emerging Markets Equity and Global Emerging Markets Smaller Companies funds, which between them hold more than £15 billion in assets.

The Edinburgh-based firm said further heavy inflows could cause potential liquidity issues that could compromise the investment process. In other words, the sheer amount of money under management could force the managers to invest in companies that could otherwise be avoided.

Aberdeen hopes to protect investors already in the funds by ensuring that current performance track records are maintained.

Others to have taken similar steps in recent times, include the popular Troy Income fund, the UK Standard Life UK Smaller Companies, the First State Latin American and Asia Pacific Leaders funds and the JO Hambro Japan.

Haig Bathgate, chief investment officer at Turcan Connell in Edinburgh, said such soft closures are generally positive for existing investors in the affected funds.

“It should protect the existing unit holders to a degree and stops speculative flows into hot areas increasing,” he said.

“It is not a holy grail, however, and it makes sense to ensure that you fully understand the liquidity of the underlying holdings in any strategy.”

Investors in commercial property funds were caught out for similar reasons when the market plunged dramatically in 2008. Edinburgh-based providers including Standard Life, Aegon and Scottish Widows were among those who blocked withdrawals from their property funds to prevent outflows that threatened to create a liquidity crisis.

Emerging market funds have attracted massive inflows in recent years, but any downturn in what is a volatile market could spark rapid outflows. Even before First State soft-closed its Asia Pacific Leaders fund last year it had taken the same step on five of its global emerging markets and Asia Pacific funds. It said the funds had reached a point where their size could affect their performance and limit their ability to invest in smaller companies.

The Aberdeen emerging markets fund is among the largest 20 domiciled in the UK, but it’s far from the biggest. That distinction belongs to the £29.5bn Templeton Global Bond fund, one of six bond funds among the top 20 biggest unit trusts/Oeics (see the tables on this page for more details).

That may be the sector to watch if you’re wondering where the next soft closures are coming from, as fears grow of a potential bond bubble.

“Equity-focused funds are unlikely to be hit as hard as fixed income funds or funds that have significant emerging market currency exposure in more esoteric areas,” said Bathgate. “We are particularly concerned about fixed income funds where underlying liquidity has reduced very significantly.”

Investors should check the liquidity of a fund’s underlying portfolio and consider what it would be expected to trade like in a negative as well as a positive market, Bathgate advised.

“Also, remember that while soft closure means no new investors are allowed, it does not mean that existing investors can’t add to the strategy,” he said. “A number of the funds that have soft closed will continue to increase in size and they are already very large.”

As the latest developments suggest, the size of a fund is increasingly worth looking at when you’re weighing up a new home for your investment cash.

The assets under management figure is one of the most important things to check before investing in a fund, according to Bathgate. Where possible that also means finding out if the fund manager is rewarded on performance or attracting new money.

The extent to which size can become a concern depends on the sector too – the smaller the universe of potentially desirable fund holdings, the greater the possibility that a large influx of cash would force the manager to invest in companies he would otherwise overlook. “Ultimately everyone is driven by incentives but having the largest fund is unlikely to yield the best return,” said Bathgate “We seen in many cases a link between fund size growth and a fall off in performance and this is even more prevalent now that underlying market liquidity is significantly less than it has been historically.”

If you do need to make changes because of concerns over certain funds or due to a fund soft closing, make sure they don’t upset your investment balance.

“Soft closure could lead to portfolios having to be realigned if the investor and adviser deem a change of fund necessary and a replacement, usually from the same sector should be carefully selected in order to maintain the same asset allocation,” noted Tom Munro, dir­ector of IFA Tom Munro Financial Solutions.

“My concern would be for investors acting on their own who may not spot internal changes such as increases in charges who continue to hold the fund not knowing more value could be obtained by switching.”