Did Fund Size Matter to Performance in 2015?

When a fund gets significantly larger it can mean that it is increasingly difficult to generate meaningful outperformance from individual security selection 

Jeremy Beckwith 2 February, 2016 | 12:34PM
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2015 saw the two largest funds in the UK market enjoy very different fortunes. Continued strong inflows into SLI Global Absolute Return Strategies (GARS) added £2.6 billion into the UK version fund to November, which saw its assets rise to £26.8 billion, with total assets in the strategy now totalling over £44 billion. In contrast M&G Optimal Income saw net outflows to November of £6.2 billion and its assets decline to £16.3 billion.

GARS’ performance of 2.2% in 2015 was below its three-year average rolling target return of Cash +5% gross of fees, but nevertheless was a reasonable outcome in a tricky year for financial markets – the inflows came on the back of delivering good performance over previous years whilst staying within its volatility target of 4-8%. For Optimal Income however, disappointing performance in 2014 relative to its Morningstar category and a decline of 1.2% in 2015, along with increasing investor concerns about future returns from bond funds as the Federal Reserve moved closer towards raising interest rates, have come at the same time.

For both funds, size has meant that it is increasingly difficult to generate meaningful outperformance from individual security selection, which was a feature in the early days of both funds. However both funds seek to deliver returns from a wide variety of sources of alpha, which are generally asset-allocation and top-down in nature. Even though both funds appear to be very large, given their aims to trade in the money, bond and equity markets all over the world and their ability to use derivatives to efficiently manage exposures, we don’t think liquidity is as pressing an issue as it might seem. M&G’s recent disappointing performance was mostly due to its underweight stance on duration in its bond holdings. This stance could be reversed quickly through the use of derivatives even for a large fund like Optimal Income.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
ASI Global Absolute Ret Strat R Acc76.77 GBP-0.45Rating
ASI UK Smaller Companies R Acc1,151.00 GBP0.00Rating
Invesco UK Eq High Inc UK Inc317.26 GBP-0.88Rating
Invesco UK Equity Inc UK Inc1,258.16 GBP-0.90Rating
LF Equity Income A Sterling Acc3.35 GBP0.00
M&G Optimal Income GBP A Acc229.58 GBP0.14Rating
Marlborough Special Situations A Acc2,343.53 GBP-0.11Rating

About Author

Jeremy Beckwith  is Director of Manager Research for Morningstar UK