In an update on the Charles Stanley Direct website senior analyst Rob Morgan said the growing size of the fund has led the team to question whether it is still one of its best ideas on a five-year-plus view.
Morgan said the fund, managed by Terry Smith (pictured), continues to “forge into unchartered territory in terms of its size, and this presents a small discomfort to us on a longer-term view”.
He added: “At around £19bn it is the largest UK retail fund and it continues to attract substantial inflows from investors. As a fund grows in size it can sometimes mean the loss of flexibility in terms of the number of available investments.”
Charles Stanley has not replaced the fund with another, a spokesperson told Portfolio Adviser.
Only an issue if the fund sees redemptions
Chelsea Financial Services managing director Darius McDermott said he understands why Charles Stanley took the decision, given the industry’s sharp focus on liquidity following the suspension of the Woodford Equity Income fund. But he said Chelsea continues to support the fund on the basis it has grown into its style which has always been to invest in large and mega cap companies.
“The big issue tends to come if and when these super funds end up in redemption. If this fund was permanently losing money it would be of greater concern,” he added.
McDermott said the fund could experience redemptions if the market were to switch from growth to value, putting Smith’s style out of favour. “But that doesn’t appear to be happening any time soon.”
He did, however, say the fund could be more transparent over its liquidity profile by publishing more regular data on flows in versus flows out.
High conviction could create challenges
Willis Owen head of personal investing Adrian Lowcock agreed the fund’s focus on large global companies means its size is not yet an issue as the companies Smith invests in are large and liquid.
However, he said because it is a concentrated portfolio and Smith only invests in high conviction stocks with little change as the fund grows in size, at some point it will become a challenge to continue to invest in his preferred companies.
He added: “I don’t think we are at that stage just yet, but because the fund is growing in size quite rapidly it is important to monitor the size. Smith has proven exceptional in managing the fund and surpassed even his own expectations in terms of performance.”
‘Barely put a foot wrong’
Morgan said Smith has “barely put a foot wrong” since the fund’s launch noting year to date it has returned 19.6% versus 11.7% for the MSCI World Index and ranked eighth out of nearly 200 funds in the Investment Association Global sector.
He also noted the fund does not suffer from the liquidity issues that blighted the Woodford fund. “Holdings are generally exceptionally liquid, meaning they are easy to trade in large quantities,” he said.
But he added: “Nonetheless, we feel it is appropriate to remove the fund from the Foundation Fundlist of preferred funds for new investment in order to reflect the opinions held across the Charles Stanley collectives research team.”
Fundsmith declined to comment.