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No entry: what it means if your fund is soft closed

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22/11/2013
When we look back at 2013, one of the major themes will be the flurry of successful funds which have been closed to new money.

Big name funds such as Standard Life UK Smaller Companies, First State Global Emerging Market Leaders, Aberdeen Emerging Markets and Fidelity UK Smaller Companies have all been what the industry refers to as “soft closed”.

When a successful fund shuts its doors, it is obviously frustrating for investors who can no longer access the skill of a top fund manager. But what does it mean for existing shareholders?

Here, we explain what you need to know if one of your funds has been soft closed:

What are soft closures?

“Soft closure” is a broad catch-all term which describes the process whereby a fund group restricts the size of a fund.

Jason Hollands of Bestinvest says: “It can be as subtle as to stop proactive marketing activity. However, tangible methods include imposing initial charges which advisers are not allowed to discount or raising the minimum investment level to a threshold that put the fund out of reach for most retail investors, e.g. £250,000, or removing it from fund supermarket platforms.”

Why do groups soft close funds?

The motivation is typically to protect the interests of existing investors if these funds become too big for their market and style. If this happens, the manager can no longer effectively implement their investment views because the portfolio becomes restrained in its ability to buy and sell in sufficient quantities.

Hollands says: “While funds investing in large, global companies such as FTSE 100 and S&P 500 shares are unlikely to have problems due to fund size as these shares are easily traded, fund size can be a problem if its mandate is to invest in niche areas and less liquid markets.

“This is especially the case for funds which focus on smaller companies, since growth in fund size may prevent it from being able to have a meaningful position in very small stocks. Size therefore can be problematic for certain, but not all, funds as unchecked growth may require the manager to change their approach and compromise the very performance that attracted investors in the first place.”

Can I add to my position in the fund if it has been soft closed?

Yes, existing shareholders can still buy shares of the fund after its doors have closed to the public. However, if your fund has been “hard closed” it will not accept new money from new or existing shareholders.

The Cazenove UK Smaller Companies fund became the latest fund to “hard close” this week, following a wave of inflows into the product which saw it breach the £1bn mark.

Should I panic if my fund has been soft or hard closed?

No, there is no cause for alarm. Your interests are being looked after.

“If you are in a great fund that hard closes you are lucky. Stay in,” says Hollands.

 

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