A recent conversation with Robert Burdett and Gary Potter, co-heads of multi-manager at F&C, suggests that they just might not.
If significant asset growth puts performance into jeopardy then how do managers strike that balance of being good, but not too good, and becoming a victim of their own success?
As buy lists start to look increasingly similar and new model-based solutions are coming to market on an almost weekly basis, the priority for many sales directors is to land those coveted slots.
Asset class ownership
If you ‘own’ an asset class, you’re probably somewhat ahead of the pack and Henderson (Property), M&G (fixed income) and once upon a time Invesco Perpetual (UK equity income) have probably had a relatively easy run up until now.
The rationalisation of the UK fund industry has been long-called for, with too many ‘mediocre’ funds and mid-sized groups that fail to compete on either quality performance or value for money.
But as the D2C market grows and burgeoning buy list influence forces down headline fund costs there is something of a double-edged sword hanging over the industry’s heads.
If you have a decent track record, you deliver against your objectives and you have the support of a well-furnished marketing pack behind you, you are likely to draw in assets.
Those successful enough to have ticked all these boxes and landed a coveted place on certain distributor’s core lists, you will be rewarded with marketing support and in turn more assets will come your way.
But at what point does this start to hit performance?
Potter and Burdett draw the comparison between small cap experts Alex Wright at Fidelity, who closed his fund to new investors at £300m and Paul Marriage, now at Schroders, whose fund swelled from £300m to £1.3bn in a year (following the acquisition of Cazenove), one would assume, through the deeper pockets and broader distribution efforts enjoyed through the larger group.
They say as more assets flow into the behemoth funds, it leaves them freer rein to invest in smaller funds, with a more disciplined approach to capacity constraint, such as Majedie, which actively stems inflows across its range.
Philosophy vs mechanics
Stewart Smith, investment research manager at Rayner Spencer Mills Research, says there is a possibility that performance is put at risk when funds get bigger, but adds there are many moving parts, from the asset class in which the fund invests to the resources available to the manager to help cope with the larger fund.
He points to a group like J O Hambro, which gives itself an AUM limit from the outset of a fund’s launch, a limit beyond which the managers become less comfortable.
“That is a more philosophical approach than mechanical. They set themselves a limit to the size of the fund they can run optimally, without performance being affected.”
But he says at RSMR they are always cognisant of fund size and the growing assets having greater resources on which they can draw in order to cope.
Mike Webb, CEO at Rathbone Unit Trust Management recently issued warning over funds that grew too much or too quickly that end investors would suffer.
Style drift
Elizabeth Savage, research director at Rathbones adds: "Broadly speaking, we favour funds where managers are aligned with investors, to allow a focus on performance, and this includes funds where capacity is managed sensibly. This means we recognise both the benefits of resource and infrastructure that the large asset managers can provide in running certain strategies, while also acknowledging that there may be instances where it is more appropriate to manage capacity and flows to avoid 'style drift'.
"Where we believe that the growth of a fund is becoming detrimental to the way in which a manager invests, we would not hesitate to question it."
So in short, the smaller, more nimble funds will remain the domain of the professional fund buyer while the larger, better marketed, omnipresent products will continue to populate the ISAs of the masses but will be robbed of returns for taking the ‘safer’ route. Risk/return trade-off in its finest example, I suppose.
