Every year, investment funds close their doors to investors for various reasons.

It is very rare for funds to shut up shop completely. Instead they will  ‘soft’ or ‘hard’ close. Neither path means a fund shuts down entirely, just that new investors are excluded.

Soft and hard closures

A ‘soft’ closed fund will not accept money from new investors and while it does not prohibit existing investors from investing more, it puts up barriers to entry such as increased charges and minimum investment requirements.

A ‘hard’ closure blocks further investment in the fund completely.

“Existing investors will be warned in advance if a fund is approaching full, so they have time to invest further or sell,” says Russ Mould, investment director at online stockbroker AJ Bell.

Rob Pemberton, investment director at asset manager HFM Columbus, notes funds are closed in this way because “managers feel that should the fund become any larger, future returns will be compromised as the fund becomes unwieldy and inflexible”.

He says: “The fund could face liquidity constraints if it grew any bigger, being unable to buy or sell positions it would otherwise wish to do.”

The recent closure of Majedie Asset Management’s UK Income fund is an example of a soft closure. The fund surpassed its £1.5bn assets under management threshold, and its managers didn’t want it to get any bigger.

Another option is for the fund to be withdrawn from promotion, meaning it is not advertised and is removed from broker buy lists.

Closed for good

Full closure, where funds cease operations entirely, are rare. If they do happen, investors shouldn’t panic.

“Funds close for a number of reasons and the majority are not bad for investors in the long run,” says Adrian Lowcock, head of investing at AXA Wealth.

“Common reasons are lack of investor interest, change of focus for the business or a fund no longer being profitable to manage because of the sector or capitalisation it is invested in.”

Complete closures rarely come out of the blue. Funds have a responsibility to inform investors when they are closing, why, how much of their investment they’ll get back and how long they’ll have to wait to receive it.

“The provider will normally offer a default alternative to move investors into automatically, and/or give investors the option to switch to a new fund of their choice,” says Mould.

It is possible to avoid fund closures in advance. Lowcock recommends looking at the size of a fund before investing and says anything below £50m should raise concerns about possible closure.

“There are some exceptions, for example, micro-cap funds tend to be smaller, for obvious reasons,” he says.

The recent closure of two AXA Investment Management funds (Sterling Long Gilt and Sterling Long Corporate Bond) are examples of full closures. The funds are being withdrawn due to a lack of demand and shortage of assets.

Welcome, or cause for alarm?

Soft and hard closures are generally considered a positive development.

“A closure is a protective measure shielding investors and their money from potentially dangerous over-expansion,” says Mark Dampier, research director at Hargreaves Lansdown.

“The prospect of a fund management group continuing to offer up a fund to the public, even if keeping it open means performance worsens and the managers are forced to change investment style, is far more concerning.”

There are several sectors in which soft closures are a predictable and necessary phenomenon. For instance, small-cap funds commonly soft close for extended periods. This is because the larger a small-cap fund is, the harder it is for the fund to invest effectively.

Dampier says small-cap funds “start to suffer” when they reach £500m.

“Small-cap stocks generally have fewer shares in circulation, meaning it can be difficult to buy them in appropriate amounts,” he explains.

“The bigger a fund becomes, the bigger the stakes a fund needs to take – stakes that may not be sensible, or even possible to take.”

If a small-cap fund gets too large, it can also end up effectively dealing against itself, pushing up share prices every time it buys shares in a company, and pushing them down when it sells.

Other options 

An alternative to soft closure is for funds to diversify into other areas. A sector-specific fund that runs out of worthwhile opportunities in its chosen industry could move into related areas, a region-specific fund could broaden its geographical reach, a capitalisation-specific fund could branch into larger or smaller stocks.

“This may be an issue for investors if they were attracted to a particular aspect of a fund – for instance, a sector overweight or dedicated regional focus – that its new arrangement doesn’t reflect,” Dampier says.

“Closure may well be a preferable option to you. If your fund is moving into new areas they have a duty to inform you. When they do, check the fine print to make sure you’re happy with the new path.”

Access denied

How investors should react to a closure depends on their own preferences. They may wish to stay put, although this means increased costs and potentially preclusive investment requirements.

They may wish to cash out and invest elsewhere, although they may never have an opportunity to access the fund again.

If your fund soft closes, bear in mind it may reopen in future, its higher investment barriers retracted accordingly. Conversely, you may consider higher fees a price worth paying due to the quality of the fund and its manager(s).

“If you feel a soft closed fund is unique, and are confident it can maintain or improve its performance over time, then staying put may make sense,” says Mould.

“However, you should also see whether there are similar funds which remain open – and if the manager runs any other funds, allowing you to benefit from their skills in other areas.”

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