Small cap funds struggle after closing
By Jason Spits
Small cap funds do not always perform better after closing despite this often being the justification for closing a fund to new investments, according to findings released by Navigator Research.
In the past three years, small cap funds offered by ING, JBWere, Perpetual, Portfolio Partners, and Equity Trustees have closed, while Challenger and Investors Mutual have recently closed their respective Smaller Companies Fund and Future Leaders Fund to new investors.
Navigator research manager Stuart Fechner says the relative performance of these funds can drop off once they close but says this is not always linked to the closure of the fund itself, with reasons for closure and performance levels often linked to other factors.
Fechner says a closed fund with reduced inflows will find it difficult to actively manage, as more equity holdings will need to be sold to make new stock purchases in the fund and in the event of high turnover, would lead to higher costs and reduced end-performance.
He also says a period of good performance can cause a spike in inflows, resulting in the fund’s closure, and with any subsequent underperformance, a fund is likely to suffer poor relative performance.
Fechner adds it is worth noting if a fund has performed strongly versus its competitors for several consecutive years.
“We know strong performance attracts investors to a fund, however, we also know good times don’t last forever, and rarely is one fund the best performer year in, year out.”
According to Fechner, the impact of the closure of a fund and the correct time to do so are hard to measure, but he does note that most close around the $500-600 million mark, which is about 1 per cent of the small cap market.
This level of funds is regarded as the point where the fund is at capacity and managers can still generate outperformance in the small cap sector.
AUTHOR
Jason Spits
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