As fund buy lists become more concentrated, the number of ‘soft-closures’ has risen. While vital to protect the feasibility of some strategies, many fund buyers are taking issue with how this is communicated.
Most investors have at least one fund that they would love to buy but is ‘soft-closed’, that is, unavailable for new business because it has reached the size that the asset manager deems appropriate.
Taking the decision to turn down inflows takes restraint by the manager and should be applauded, as it means they are considering the needs of existing investors and seeking to maintain the fund’s original investment style.
But it is not always clear what a group means when it talks about soft-closing a fund – for example, whether it involves additional charges or the fund’s removal from platforms.
Stephen Peters, an investment analyst at Charles Stanley, notes soft-closures are becoming more prevalent.
‘The fact that the wealth management industry is increasingly working off preferred lists means the funds are likely to close quicker than they have done in the past because of the wall of money that is going into them,’ he said.
Peters says it is ‘incumbent on the industry to recognise good managers early’. He believes that for fund selectors such as himself, soft-closures are communicated well enough.
But Jason Hollands, managing director of investment broker Bestinvest, believes the problem is that the phrase is used as a blanket term by fund management groups.
‘The problem is the term is a bit of a catch-all for varying measures. We prefer a clear signal that a fund will seek to limit inflows at a future capacity level,’ he said.
He argues that wealth managers are being put in an ‘awkward spot’, in which they are expected to unofficially enforce the closure of a fund.
‘We prefer soft-closures through tangible measures, such as increased initial charges, over incidences where some groups pursue a more softly, softly approach of ceasing marketing, not making managers available for meetings, stopping adding funds onto new platforms and de facto encouraging intermediaries not to give them business. This puts wealth managers in the awkward spot of being asked to discourage clients from investing in a fund that they could still buy,’ Hollands said.
Ben Seager-Scott, senior research analyst at Bestinvest, agrees the basic fact that a fund is to soft-close is generally made clear. But he says things can start get murky when groups attempt to explain the exact form this will take.
‘Often the communication coming out is not clear, not that they are doing the soft-closure, but communicating the details of what is being done, how and who is affected,’ he said.
Seager-Scott thinks this is particularly relevant when it comes to large emerging market funds, which are often recipients of ‘hot money’ as sentiment around the asset class shifts. For example, in 2013 First State and Aberdeen Asset Management both soft-closed some of their top performing emerging market offerings over capacity concerns.
In April of last year, Aberdeen imposed a 2% initial charge on its £3.7 billion Emerging Markets fund, while in the same month First State announced it would close Jonathan Asante’s €4.9 billion First State Global Emerging Market Leaders fund to new investors from September 2013.
Seager-Scott points out soft-closure is ‘not like flipping a switch’ but a slow process that cannot be instantly reversed if a fund’s circumstances change.
‘Last year, there was a huge rally and everyone was piling in. Both groups were trying to avoid soft-closure, but they had lots of attention and lots of money coming in. Then you had all this money starting to move out with the asset allocation decision to move out of emerging markets,’ he said.
‘But funds can be difficult to reopen. It is not a rapid process.’
Funds close too late
Ben Gutteridge, head of fund research at Brewin Dolphin, suggests that, if anything, funds don’t always soft-close as quickly as they should.
‘Undoubtedly there are funds that are a victim of their own assets, and that is something we watch for,’ he said. ‘On balance, funds will soft-close too late. That is the commercial nature of the industry, but the fact they are doing it is still a positive.’
While these collective specialists agreed fund groups were doing the right thing for their existing clients by electing to stem assets, concerns remain about how exactly these firms then go about the process of dissuading new investment.Because soft-closure is not an exact science, it’s tempting for groups to simply tell interested parties their products are closed to new investment. However, they should endeavour to be as specific as possible so that investors know exactly how long they have left to access their desired fund.