Behemoth funds are an increasing by-product of concentration and crossover in buy lists, and are a significant problem for investment managers and fund analysts today.
It is a timely topic, with star manager Neil Woodford set to launch his CF Woodford Equity Income fund and many expecting him to attract billions in a number of months. While Woodford has shown that it is possible to manage over £30 billion and retain a high conviction style, others fare less well after their funds balloon in size.
Large flows can not only affect the liquidity profile of a fund but also pressure the manager to alter their mandate.
‘What you see is fund managers redefine their mandate to say it has more of a large cap focus,’ said Oliver Tucker, a fund of funds manager at Sarasin & Partners.
‘This is one of the reasons you need to be aware of style drift. It is not the same fund any more. Most large funds we see today that are big have to be managed in a different way and they can become different beasts.’
This does not necessarily mean it is time to sell the fund, but Tucker advises monitoring whether the manager is able to adapt their process and stay true to it, albeit with a different focus.
‘When people try and talk about whether there is someone that has the skill of running larger sums of money, I think in most cases it is not about saying how skilful they are, but are they able to adapt what they do to a larger scale so the profile is similar but not the same?’
He believes Nigel Thomas, manager of the AXA Framlington UK Select Opportunities fund, is someone who has been able to do this. Thomas’s fund is £4.8 billion, having attracted substantial flows over the past five years. While Tucker suggests there are subtle differences in the way Thomas manages money now, he believes the manager has retained his skill.
Alan Sippetts, head of manager research at Heartwood Investment Management, says a significant change in a fund manager’s approach rings alarm bells. He therefore advocates funds closing if they become too large or cramp the manager’s style.
‘I would rather see the same manager or team recognising there is a limitation to what they can do by limiting the size of the portfolio. Closures are unfortunately a by-product of success, but to be honest they are necessary,’ Sippetts said.Five questions to ask
There are no hard and fast rules when it comes to working out whether a manager’s style is changing as a result of the size of the fund. Each manager is different and how much money they can run before they are affected will depend on the markets they invest in.
However, Sarasin’s Oliver Tucker has revealed five questions to ask to ensure size is not compromising the fund manager’s style. If asset growth over the past 18 months is over 100%, he suggests there could be grounds to feel nervous.
1) How good has recent performance been?
2) How much crossover is there in the top holdings of the fund compared with funds that have a similar ranking?
3) How does the fund’s performance compare to its history?
4) And how does this fit with previous patterns in the fund manager’s history?
5) What have the asset flows over the last 18 months been?