Opportunity to look at portfolio

THE trend for fund houses to either merge or close down small and under- performing funds is continuing.

THE trend for fund houses to either merge or close down small and under- performing funds is continuing.

Given the thousands of funds/unit trusts and open-ended investment companies (OEICs) available to the retail investor in the UK, this is in some ways a natural culling of an arguably overcrowded market.

According to new research from fund data provider Lipper, last year 39 funds were merged with others from the same fund house stable, while 81 were closed down altogether. In the previous year 56 mergers and 127 funds disappeared. Based on figures to the end of July, Lipper predicts that this year we will see 50 mergers and 72 closures.

What’s the reason for this? There is no doubt that the dramatic fall in the stock market in 2008 affected fund groups’ assets under management and in consequence their profitability, as the value of funds fell and investors pulled out of the markets, since funds receive a percentage of total assets held and any drop off in assets equals a fall in revenue.

Since funds can have significant fixed costs attached to them – fund manager salary, administration, marketing and fund custody – as the size of a fund falls so it becomes less viable for the fund house to maintain. From a purely business perspective, it is easy to see why a fund group might therefore consider merging the fund into another or closing it down altogether.

What it can also do is shift an under-

performing fund that is potentially a blot on the company’s investment reputation into an (often) larger and better-performing entity. Where this is the case, a merger can be to the benefit of the investor. However, these unilateral actions by fund houses are not always in the investor’s best interests.

When it comes to fund closures, investors are often given no say in the action other than to choose whether they want to move their investment into another of the funds run by the group or sell out.

When it comes to mergers, investors need to carefully examine the terms of the merger and how it will affect their overall investment strategy.

Charges are an obvious area to examine. Charges on funds tend to be around the 1.5% mark for actively managed funds. However, some funds can have an additional administration charge. Careful reading of the paperwork sent from the fund house is, therefore, very important. However, that can be easier said then done, particularly as the letters and literature sent out by fund houses can be far from clear. If the data and information are not clearly laid out, this could be a way of hiding some unwelcome surprises.

Most importantly, it is essential to ensure how this enforced change will affect your portfolio.

As independent financial advisers we know the considerable time and effort that goes into researching funds, in particular to ensure they are compatible with the investment strategy of the investor and their ultimate lifestyle aims and financial goals.

Whether the fund is being closed or merged it is an opportunity to review your portfolio and consider whether the proposed merged fund might fit or if a new fund may be more appropriate.

:: Ian Lowes is managing director of Jesmond-based Lowes Financial Management


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