More than one-fifth of the money being run by Investment Association funds is concentrated into just 37 funds, research by FE Trustnet shows, renewing concerns that too many investors are herding into too few funds.
After reviewing all the assets under management data held on FE Analytics, we found that the largest 1 per cent of funds are running some 20.2 per cent of the money held in more than 3,700 portfolios in the Investment Association universe.
Furthermore, just under 61 per cent of assets under management is being run by the 373 funds that make up the biggest 10 per cent of the industry.
Source: FE Analytics
In contrast, only 4.6 per cent of Investment Association money is held in the smallest half of the universe, which comprises 1,863 funds.
This trend of a small group of funds running a growing share of total assets has been in play for some time. Research carried out by Premier Asset Management found that the biggest 1 per cent of funds ran 12 per cent of all industry money in 2002 but this had moved beyond 20 per cent by 2014.
According to the firm, these ‘one percenters’ had been “stealing market share from every other part of the market” over the past decade. It added that this trend was driven by a growing tendency for money to only go into funds that are the cheapest, have strong recent performance or benefit from powerful distribution channels.
When asked about the investor herding going on today, Premier Asset Management senior investment manager Simon Evan-Cook said: “This clustering into a handful of funds does concern us. As with any ecosystem, it’s far healthier for a market to have a healthy mix of reasonable-sized components.
“If only a few giants start to dominate at the expense of everything else this can make the whole construct more fragile. In the case of markets, more and more investors converging on the same stocks, usually around a benchmark, could make the result of an investor panic all the more severe as everyone rushes for the door at the same time.”
Evan-Cook added: “I can even imagine a situation – sometime way off in the future – where regulators actively try to prevent too much benchmark-linked investing to improve the overall health of the equity market. Quite a different situation to where we are today.”
FE Trustnet’s research also tried to find out which peer groups had the most clustering. In order to do this we looked at the share of each Investment Association sector that was held in its largest member; the results of this in the mainstream sectors can be seen in the table below.
Source: FE Analytics
The IA Sterling Strategic Bond sector is at the top of the list as it is home to the £51.5bn Pimco GIS Income fund, which is the largest fund on the overall list (although the bulk of this money is from international clients). This is equivalent to 41.1 per cent of overall assets, according to FE Analytics data, although there are 87 funds in the sector.
In fact, another two members of the sector are found in the 1 per cent of largest funds: the £23.8bn M&G Optimal Income fund, which is the third biggest fund in the industry, and the £6.5bn Legg Mason Western Asset Macro Opportunities Bond fund, which is the 34th largest. Together, these three funds account for more than 65 per cent of the money held in the IA Sterling Strategic Bond sector.
Within the IA Asia Pacific Including Japan sector, 35.9 per cent of the peer group’s assets are managed by the £619.6m JPM Pacific Equity fund. This is one of the smaller Investment Association sectors, however, and includes just seven funds, with none being found among the largest 10 per cent of the industry.
When it comes to IA Technology & Telecommunications, its largest member is the £4.8bn Pictet Robotics fund and it runs 31.2 per cent of the peer group’s total assets. The sector, which has 16 members, is home to four funds that are among the universe’s largest 10 per cent: together they run 75.6 per cent of its total assets.
While some investors may feel reassured holding a larger fund, this doesn’t mean it will remain one of the strongest performers of its sector.
We looked at the average quartile ranking of the largest 1 per cent of Investment Association funds and it suggests their relative performance has worsened as they got larger. Over the 10 years to the end of May 2018, the average quartile ranking for the ‘one percenter’ funds was 2.25 but this narrows to 2.67 on the five-year view and 2.79 over three years.
Evan-Cook said this means investors have to pay more attention than ever to fund size. He argued that 20 years ago it was possible to find a good fund and hold it “for decades” but these days funds can become uninvestible after just a few years because of rapid growth in size.
“For us as investors in funds, fund size is one of the most important factors we look at,” he concluded.
“Large funds should benefit from lower OCFs [ongoing charges figures], but this can easily be swamped by the fact that it’s much harder to manage a large fund than it is a small one. So naturally, in our never-ending quest to invest only with the market’s very best managers, we are drawn towards managers running smaller funds.
“That said, we wouldn’t necessarily avoid the largest funds just to be different. If the largest fund in any sector is still the best, in spite of its size, then it makes little sense to sell it on that basis alone.”