Three in 10 funds hold less than £30m and underperform and charge more than their peers on average, according to Fund Strategy research using data from Morningstar.
As reported last week, at least three-tenths of funds in the Investment Management Association (IMA) sectors hold less than £30m in assets – the level most multi-managers regard as the minimum for the average economical fund.
Morningstar data has now demonstrated that the funds on average underperform their sectors over one, three and five years, falling roughly into the and perform worse if their size falls below £10m.
Over one year, the average fund with less than £30m or £10m is sixth decile. Over three years, the average fund with less than £10m is seventh decile, while the average fund with less than £30m is still sixth. Both are seventh decile over five years.
The average total expense ratio for a sub-£30m fund is 1.88%, rising to 2.02% for sub-£10m funds compared with a 1.61% average.
Some 733 funds out of 2,450 in Morningstar’s IMA sectors database fall below the £30m mark
Some 733 funds out of 2,450 in Morningstar’s IMA sectors database fall below the £30m mark, with an average size of £13m, but Morningstar says the overall figure is probably larger as many smaller funds have not disclosed their size. Some 194 funds hold less than £10m.
Ryan Hughes, a fund manager at Skandia Investment Group, and Dean Cheeseman, the former head of multi-manager at F&C Investments, agree that £30m is generally regarded as an economical fund size and any funds below that are in danger of closure.
As a result, Hughes says groups could merge or shut down many more funds in the next few years. (article continues below)
Cheeseman points out that certain unusual circumstances would make a fund investable below the £30m barrier, such as if it was in the soft launch stage or in the early stages of a hard launch.
Tony Yousefian, the chief investment officer at OPM Fund Management, adds that some smaller fund management companies can keep funds economical below £30m as they have fewer costs.
Larger companies can also generate economies of scale. Aegon Asset Management, part of the large life insurer Aegon, says a fund would be reviewed if its size fell below £10m, not £30m.
Funds can be kept open for strategic reasons, such as if they have been acquired and a group wishes to try a different marketing or management strategy, or if they represent potentially lucrative areas.
However, the median launch year for a fund holding less than £30m or £10m is 2006, suggesting that groups have had plenty of time to bed down at least half of the strategies.
The sheer number of funds below £30m suggests some fund management companies may have further room to cut costs as well as boost their operations if the recovery gathers pace.
The companies that run the largest number of sub-£30m funds are: Lloyds Banking Group, with 49, HSBC, with 42, and BNY Mellon, with 16. For sub-£10m funds, the equivalent firms are: Lloyds Banking Group, with 33, HSBC, with 22, and Neptune, with 10.
Capita Financial carries out administration for 119 funds with assets under £30m and 54 funds with under £10m.