The number of ‘red flag’ funds identified by Investment Adviser as at risk of being closed or merged has declined to 23 this year, from 40 in 2015 and 2014. It marks a significant decrease since the list was introduced in 2010, when 47 funds were singled out.
The list – using data from FE Analytics and based on the metric explained in the boxout – reveals an increase in the number of funds that have been in the red flag fund list for four consecutive years to six, up from four in 2015. Two funds – the Clerical Medical FTSE 100 Tracker fund and the FP New Horizon Growth fund – are in the list for the fifth consecutive year.
Iain McGowan, head of fund development and analysis at Scottish Widows, says of the Clerical Medical FTSE 100 Tracker fund: “Its underperformance is primarily a consequence of comparison with a peer group that invests in a wider range of companies. Large companies in the FTSE 100 have generally underperformed mid- and small-cap companies.”
Ben Seager-Scott, director, investment strategy at Tilney Bestinvest, calls it the “worst offender” on the list. He explains: “It’s not even a case of having bad management, it’s a grossly over-charging FTSE 100 tracker fund. Frankly, if you’re paying a TER [total expense ratio] of more than 0.1 per cent you’re being ripped off, and this is 10 times that at 1 per cent.”
But he cautions investors should not jump to conclusions when looking at funds in the red flag list. He explains: “The majority of funds start off small and grow over time, so we shouldn’t be quick to judge those that are still looking for market traction, which can often take a number of years – especially if a group goes for the ‘soft-launch’ option to carry a fund while they build a track record.”
This year, the investment house with the largest number of red flag funds is Legg Mason, including three Martin Currie funds. Legg Mason responded only to confirm the funds remain open.
| Red flag funds: Methodology |
Investment Adviser sought to identify ‘red flag’ funds – those vehicles that could face imminent pressure to be closed or merged with a sister fund – across the IA sectors using data from FE Analytics and the following metric: • The fund must have been launched in 2008 or earlier (and therefore have been through a full business cycle). • It must currently have less than £10m in assets under management. • It must have ranked in the third or fourth quartile of its peer group in terms of its performance in a five-year period. |
The number of funds run by Neptune Investment Management in the list this year is down to one, from three last year. A spokesperson confirmed its Cautious Managed fund, which had been a red flag fund for three years in a row, closed last year after attracting “lower-than-expected” investor demand. But Neptune notes the improved performance of its Emerging Markets fund, which saw it drop out of the list this year.
