With billions of pounds under management, a handful of investment funds have grown to dominate the market. But, as Rob Griffin explains, you should think twice before investing.
They are the investment industry’s equivalent of football bosses José Mourinho and Pep Guardiola. Fund management superstars at the peak of their powers.
These investors have day-to-day control over billions of pounds that can be used to buy exciting, innovative companies from around the world.
It’s a high-pressure job that puts them under constant scrutiny. Their performance – or lack of it – is on display in the statistics for everyone to see.
If they make the right decisions, their clients will enjoy bumper profits. If they get it wrong, they can wipe out someone’s life savings virtually overnight.
So, should you invest in one of these powerhouse funds?
Why are they so large?
In simple terms, they have grown to this size because they are popular with investors and there are several reasons why this may be the case.
For some, it’s due to delivering great returns, while for others it’s having strong marketing teams, according to Darius McDermott, managing director of Chelsea Financial Services.
“A fund may have also been in a ‘fashionable’ asset class, or with a fund manager who is very popular for some reason,” he says.
While there are constant – and totally fair – warnings not to base decisions on past performances, these nevertheless often influence people’s desire to invest in them.
“If something has performed well, there is the possibility it will do so in the future and that the strategy has worked, but that’s not always the case,” he adds.
Which funds have become the biggest?
UK investors’ favoured funds don’t necessarily have the same focus. Some will invest in global equities, while others embrace a variety of asset classes.
However, they share one or more key characteristics, according to Patrick Connolly, a chartered financial planner at Chase de Vere.
“These can be having strong performance records, a respected manager, low charges, or strong channels of distribution,” he explains.
Typically, it’s only so-called passive funds that can compete in terms of charges because they replicate particular indices, rather than being run by an active manager.
This means the person at the helm has less freedom to search the market for exciting opportunities as they need their fund to buy companies on the index itself.
“Distribution channels are also hugely important to fund sizes,” says Connolly. “All funds with aspirations to be larger need to be available on the main investment platforms.”
Having such a presence can boost inflows if they appear on the best buy lists of the largest fund sellers.
“We’ve seen, time and again, how the funds promoted by Hargreaves Lansdown attract high levels of new investments,” he adds.
Pros and cons of large funds
A fund’s size can make it powerful because it usually owns a decent percentage of individual companies.
As meaningful shareholders, this gives the fund’s managers a strong voice. “They can potentially influence management teams to do better,” points out Chelsea’s McDermott.
However, there are potential downsides. While many large funds have grown in popularity due to strong past performance figures, it doesn’t mean this will continue.
“Funds can get too big, the manager has to change their strategy to deal with the extra assets, and then it doesn’t do so well,” he adds.
It also depends on what the fund invests in, according to Patrick Connolly, a chartered financial planner at Chase de Vere.
“It may be easy to buy and sell the largest companies listed on the main stock markets, but this becomes more difficult if you’re investing in smaller companies or less liquid markets, such as the emerging economies,” he explains.
This is why it’s important to understand how funds are managed – and to constantly monitor them to ensure they’re meeting your needs.
“There are very few funds which become much larger and then continue to maintain the impressive performance which made them popular in the first place,” adds Connolly.
The largest funds
Analysts at Financial Express have provided us with a list of the largest UK OEICs and UK Authorised Unit Trusts – all of which have billions of pounds under management.
Interestingly, this line-up features a mix of individual and team approaches. There are also funds focusing on equities and those taking a broader, multi-asset approach.
M&G Optimal Income
Size: £23.8 billion
Richard Woolnough. He joined M&G back in January 2004, having previously worked for names such as Old Mutual and SG Warburg.
The fund aims to provide income and capital growth. It has a flexible approach, with at least 50% of assets invested in bonds.
Standard Life Global Absolute Return Strategies
Size: £17.5 billion
Multi-asset investing team. This fund takes a team approach to the management of this portfolio.
To provide positive investment returns in all market conditions over the medium-to-long term. It invests in a mix of traditional assets and investment strategies based on advanced derivatives techniques.
Size: £16.8 billion
Terry Smith. Set the investment house up in 2010, having previously been chief executive – and led the management buy-out – of Collins Stewart.
It invests in equities on a global basis and the approach is to be a long-term investor in chosen stocks. The focus is on high quality businesses whose advantages are difficult to replicate and resilient to change.
Invesco Perpetual Global Targeted Return
Size: £12.7 billion
Dave Jubb, Richard Batty, David Millar and Gwilym Satchell
Its aim is to achieve a positive total return in all market conditions over a rolling three-year period. It takes a diversified multi-asset approach that includes exposure to areas such as equities, commodities and interest rates.
iShares UK Equity Index
Size: £9.4 billion
Kieran Doyle*. A member of BlackRock’s Institutional Index Equity team, he has been with the company since 2004, including his years at Barclays Global Investors, which merged with BlackRock in 2009.
The objective is to achieve capital growth by closely tracking the performance of the FTSE All Share index. It invests in equities of the companies in this index.
Invesco Perpetual High Income
Size: £9.2 billion
Mark Barnett. Has been with the company since 1996 and now has responsibility for a number of UK equity portfolios. He was previously with Mercury Asset Management.
It aims to achieve a high level of income, together with capital growth, through a portfolio primarily consisting of UK listed companies. These include giants such as BP and British American Tobacco.
Newton Real Return
Size: £8.9 billion
Iain Stewart, Suzanne Hutchins and Aron Pataki
To achieve significant real rates of return in Sterling terms, predominantly from a portfolio of UK and international securities.
BlackRock ACS 50:50 Global Equity Tracker
Size: £8.6 billion
Kieran Doyle. A member of BlackRock’s Institutional Index Equity team, he has been with the company since 2004, including his years at Barclays Global Investors, which merged with BlackRock in 2009.
Aims to achieve a return through a combination of capital growth and income by closely tracking the performance of the fund’s benchmark index. It invests in the equity securities of a number of developed market indexes.
Stewart Investors Asia Pacific Leaders
Size: £8.1 billion
David Gait, previously co-manager, took over lead responsibility from Angus Tulloch in July 2016. He has been with the company for more than 20 years.
This fund aims to achieve long-term capital growth. The fund invests in large and mid-capitalisation equities in the Asia Pacific region (excluding Japan).
Vanguard FTSE UK All-Share Index
Size: £7.7 billion
Europe Equity Index team. This fund takes a team approach to the management of this portfolio.
The objective is to track the performance of the FTSE All Share Index. It uses an indexing strategy that’s designed to replicate the index by investing in all – or a representative sample – of companies making up the index.
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