What to do if your fund closes

"We may see an increasing number of fund closures due to the increasing trend among discretionary fund managers and independent financial advisers to use model portfolios," predicts Rob Pemberton, investment director at HFM Columbus. "These typically concentrate their investments to between 10 and 15 best-of-breed funds, so the top-performing funds of the last couple of years have attracted a huge slice of money."

Read our report

High profile funds which have closed

Souce: Chelsea Financial Services, Investors Chronicle.

Methods of closure

Open-ended funds such as unit trusts and open-ended investment companies (Oeics) are designed to keep taking investors' money unlike investment trusts, which have a set number of shares. But open-ended funds can also be closed to new money or may try to discourage new investors.

The most common option over recent years has been to 'soft close' funds, whereby rather than totally stopping new money coming in, the fund providers take measures to make it less attractive to invest in the fund. Soft closing can be done in a number of different ways.

The fund provider can impose an initial charge on the fund of between 2 and 5 per cent to make it more expensive to invest.

The provider could set a higher annual management charge or raise the minimum investment to a very high level, for example £500,000, to put it out of the reach of most private investors.

Another option is to stop promoting the fund by not marketing and advertising it, asking brokers to take it off their buy lists, or taking it off fund platforms.

A more decisive option is to 'hard close' the fund, which means completely stopping money coming in. This is achieved by limited issue, whereby a fund group applies to the Financial Conduct Authority (FCA) to put a cap on the number of shares a fund has, so that once these are used up it can stop taking new subscriptions. Existing investors may be given some notice if there is time before it fills up.

Funds that don't want as much money

Over recent years a number of high-profile funds have elected to limit inflows by soft-closure, such as former IC Top 100 Fund First State Global Emerging Markets Leaders (GB0033873919).

Mr Pemberton says: "A good example is Cazenove UK Opportunities Fund (GB0031092728), which had less £100m in assets for a number of years before excellent performance brought it to the attention of fund buyers, after which it soared to £2.5bn in a couple of years. This prompted Cazenove to stop actively promoting the fund last year."

In April last year, Fidelity soft closed its Fidelity UK Smaller Companies Fund (GB00B3SW2T17) following strong interest from investors attracted by the performance.

"In order to ensure that the portfolio managers retained the flexibility to implement their investment strategy and are not constrained by liquidity, we took steps to slow flows into this fund," says Fidelity "We removed the fund from all platforms. Our priority is always to protect the interests of existing customers. Existing investors can remain invested in the fund and those who already had monthly savings plans set up when we soft closed the fund have been able to continue."

Another notable example is Standard Life Investments UK Smaller Companies Fund (GB0004331236).

"We removed special terms and initial commission available to intermediaries through various distribution channels, including fund platforms," says Standard Life Investments. "We made no change to the level of our initial charge on the fund; however, the initial charge investors paid through third-party channels may have been impacted. We tried to ensure that regular investors, who continued to have access to the fund, retained where possible their existing initial charge terms. Our overall aim was to reduce flows of money to the fund to levels that protected existing investors' interests."

Funds that don't want ANY more money

A recent example of a hard closure is Cazenove UK Smaller Companies Fund (GB0031092942) which hard closed on 22 January.

"As a result of strong inflows this year we have decided to hard close the Cazenove UK Smaller Companies fund," explains Robin Stoakley, managing director, UK intermediary, at Schroders. "The fund is consistently top decile and the decision to close the fund was taken to protect the returns that existing investors have seen in recent years and to ensure that its objective is delivered."

Stemming flows is often done by smaller companies funds, funds with a large allocation to these or ones that have a small number of holdings. This is because if a larger fund wants a meaningful percentage of its assets allocated to one small company, it could mean taking a very large stake. The fund could deal against itself, because every time it bought shares in the company it could push the price up making it more expensive, and push the price down when it sells.

It could also be hard to buy the required number of shares because there are not so many in circulation with smaller companies, and they are not as frequently traded.

"Most smaller companies funds start to suffer at around £500m and compensate by going into mid-caps," says Mark Dampier, head of research at Hargeaves Lansdown. "However, this has not been bad for performance over the past few years."

Mid caps have performed strongly over recent periods.

IC Top 100 Fund Unicorn UK Income (GB00B00Z1S94), which is currently around £564m in size, may consider soft closing when it gets to between £750m and £1bn.

Largest UK smaller companies funds

Source: Morningstar, as at 6 February 2014

Concentrated funds with large positions in only a few shares also face similar problems because they need to allocate a reasonably high percentage of their assets to each company they hold.

Emerging markets and Asian funds, meanwhile, deal in assets that are less easy to buy and sell, so they may have difficulty continually deploying new money or dealing in larger amounts.

When First State closed its Global Emerging Market Leaders Fund last year, Chris Turpin, managing director (EMEA) and global head of product at First State, explained that over the past couple of years it had grown rapidly.

"Ahead of us encountering any capacity issues that could affect the performance or restrict the team's ability to invest in certain companies we have made the decision to soft-close," he said. "Our first duty must be to our existing investors and to ensure we manage the scale of funds under our management responsibly."

What should you do if your fund closes?

Taking action to stem a fund's size is generally a good thing, according to the independent financial advisers we spoke to. It means smaller companies and concentrated funds can continue to invest in appropriate shares and their managers can continue to run money in the way they are used to. "Investors also want what they bought, for example, smaller companies rather than mid caps," adds Darius McDermott, managing director at Chelsea Financial Services.

Funds that soft or hard close to limit their size tend to do this because they are successful and so in demand. "Existing investors should not worry about closure and fund groups should be applauded for protecting existing investors," adds Mr McDermott.

But existing investors may not be able to continue investing in the fund and will need to look for an alternative for new money. And if you switch fund platforms by cashing up and reinvesting, you may not get back into a closed fund. If you want to stay in a closed fund then you should opt for an in-specie transfer, although this can incur costs.

When a fund closes some institutional investors such as wealth managers buying in bulk on behalf of clients may sell out of it totally if they cannot buy in the bulk they want or for new clients. This is because they have set investment models for all clients. This could even lead to outflows in the short term.

"But some outflows should not be a problem for medium and long-term investors," says Mr McDermott. "Rather it is more risky if you get fund management groups that wish to keep selling a fund and its manager has to change investment style and the performance doesn't continue to do well."

"If there are a lot of redemptions it could be hard for the fund manager to run the fund, but if performance continues then not too much money should come out," adds Mr Dampier.

Mr Pemberton says that, generally, you should only look to sell the fund if you wish to allocate away from the asset the fund invests in. "However, there can sometimes be a tendency for investors to pile in at the top in an asset class, buying the best-of-breed fund leading to its closure, just at the wrong point of the investment cycle," he says. "An example would be Aberdeen Emerging Markets which soft closed in April 2013 since when the price and the size of the fund has fallen, something Aberdeen probably didn't have in mind."

However, Aberdeen says it has "no plans to re-open at the moment".

"To say a fund closure is a contra indicator sell signal is putting it too strongly," adds Mr Pemberton. "But it certainly should prompt investors to ask themselves as to whether the asset class or underlying fund portfolio is a hot money accident waiting to happen or a high-quality file-and-forget holding which will continue to produce solid gains for the foreseeable future."

Accessing a closed fund

If a fund has soft rather than hard closed, it may still be possible to get in. Where the provider has just stopped marketing, the fund should still be available. The fund may still be available via platforms even if it is not via other means. And where an initial charge is put on new money going into the fund, this may not be the case with some platforms, so it is worth checking.

This was the case with Aberdeen Emerging Markets before April last year when a 2 per cent initial charge was imposed (read more on this).

In some cases existing investors can continue to top up their holding. "With soft closures, existing unit holders can often access the fund under their existing terms with the restrictions applied only to new investors," adds Mr Pemberton. "Existing investors should always double check with the asset management company as to the precise details of the soft closure to make sure they are not incurring any extra charges."

Funds that have closed sometimes reopen, so it can be worth keeping an eye on closed funds you would like to invest in. For example, IC Top 100 Fund Lazard Emerging Markets Fund (GB00B24F1P65) soft-closed in November 2010 by imposing a 3.75 per cent initial charge. But since March 2013 this charge no longer applies to investors who buy the fund from an intermediary or platform such as Charles Stanley, Hargreaves Lansdown, Selftrade or TD Direct Investing (read our tip).

Where a soft-closed fund has imposed an initial charge you could opt to pay this if you are very keen to get into the fund. "You might do this if you take the view the fund is very distinctive and are bullish on the underlying assets," says Jason Hollands, managing director at Bestinvest. "But in most areas there are usually at least a couple of other good funds covering it."

Sometimes the manager of a top-performing fund that has hard or soft closed also runs an investment trust, and you could access the manager's skills by investing in the trust.

However, the trust is unlikely to have exactly the same portfolio as the manager's open-ended fund because there are different rules on what trusts can do. Investment trusts are listed on the stock market so by nature are more volatile, and may not suit the risk profile of all investors. Investment trusts also typically trade at premiums and discounts to their net asset value (NAV), so if a manager is very successful the trust is likely to trade at a premium, making it expensive for investors to get in.

Investment trusts can also take on debt, making them in theory higher risk than open-ended funds.

Examples of this include IC Top 100 Fund Standard Life UK Smaller Companies Investment Trust (SLS) run by Harry Nimmo, who also runs soft closed SLI UK Smaller Companies Fund. This trust often trades at a premium and at the moment this is 0.33 per cent. (Read our last update on the trust)

Julie Dean, who runs Cazenove UK Opportunities Fund, last year took over Schroder UK Growth (SDU). This currently trades at around par.

Alex Wright, who runs soft-closed Fidelity UK Smaller Companies Fund, also runs Fidelity Special Values Investment Trust (FSV) which can be picked up on a discount to NAV of 3.3 per cent.