Investors are increasingly being channelled into a narrow range of market-leading large funds in the wake of tighter regulatory controls, but face the risk of them being closed to new investment, according to Rob Pemberton, investment director at wealth manager HFM Columbus.
As a fund grows its assets under management, its managers sometimes try to limit the size of the fund because they don't think they can run it with the same strategy successfully if it gets larger.
They do this by 'soft closing' the fund, making it more expensive to invest in the fund. For example, they may enforce an initial charge in addition to the annual fees. Investors can usually avoid initial charges by investing via a discount stockbroker or fund platform, but following a soft close this may no longer be possible.
A recent example includes IC Top 100 Fund First State Global Emerging Markets Leaders, which will impose a mandatory 4 per cent initial charge from September 2013 (see last week's IC Top 100 Funds update).
The problem of big funds getting bigger has been exacerbated by a change in the financial advice rules at the start of this year. To comply with stricter regulatory regime, more financial advisers have been outsourcing their client's asset allocation via model portfolios run by discretionary fund managers. The ultimate beneficiaries of this development include a handful of large established funds which have performed well and are commonly selected as holdings for the model portfolios.
"My concern is that an increasing number of these funds will be closed to new investors to prevent them becoming too large to manage and thereby threatening returns to existing investors," said Mr Pemberton. "The obvious solution for investors would be a retreat to the world of passives but there is no monopoly of wisdom in fund management and there are plenty of other, smaller funds also generating strong returns for fund buyers to select."
For investors wanting to avoid the behemoth funds which may be dragged down by their very success, the table below shows Mr Pemberton's pick of the alternatives:
Small fund alternatives to popular monster funds
| Fund | Size (£) | Total expense ratio (%) |
| UK Equities | ||
| Fidelity Enhanced Income (GB00B3KB7682) | 171.85m | 1.75 |
| Old Mutual UK Equity Income (GB00B1XG7668) | 62.37m | 1.72 |
| Threadneedle UK Growth and Income (GB0001529675) | 235m | 1.63 |
| Ecclesiastical UK Equity Growth (GB0008446170) | 70.4m | 1.34 |
| Fixed Income | ||
| Artemis Strategic Bond (GB00B09DMK36) | 545.42m | 1.09 |
| SWIP Absolute Return Bond (GB00B1265859) | 119.74m | 1.14 |
| Overseas Equities | ||
| Baillie Gifford European (GB0006057284) | 76.97m | 1.65 |
| F&C European Growth and Income (GB00B3CS8Q40) | 235.64m | 1.86 |
| Artemis Global Income (GB00B5VLFH80) | 191.82m | 1.79 |
| Lazard Emerging Markets (GB00B24F1P65) | 461.83m | 1.61 |
Source: HFM Columbus & Morningstar
