Fund briefing: are the biggest funds the best to invest in?

12 December 2018

We look at the biggest funds across different sectors, why they’re so popular, whether it’s justified and if they’re better investments than smaller rivals

They are the giants of the fund management industry, with billions of pounds under management and an enthusiastic following of investors.

Their status as major shareholders in companies also means they often wield enormous power inside boardrooms.

They can influence business decisions, ratify or block managerial appointments, and campaign for cultural changes within organisations.

But is that enough to make the largest UK funds attractive? Should you be putting your faith and money into these portfolios or opting for smaller alternatives?

Unfortunately, there is no simple answer. Funds grow for a variety of reasons – and these will determine whether or not they should warrant your attention.

In many cases, the size – and popularity – of a fund will be driven by past performance figures, according to Patrick Connolly, a chartered financial planner with Chase de Vere.

“Many investors will jump into top-performing funds, hoping and expecting that the strong performances will be maintained,” he explains.

However, there are no guarantees – which is why there are constant warnings that past performance is never a reliable indicator of future success.

A fund’s rapid growth may also be due to a strong, well-resourced sales and marketing operation behind it that is constantly reaching out to investors.

Past performance often drives the size and popularity of a fund

Such investment houses will plough millions of pounds into high-profile advertising campaigns on social media, as well as paying for billboards at railway stations.

Funds can also benefit from being in fashionable asset classes, despite the fact their soaring popularity can easily nosedive should investors get seduced by the next trend.

Having a well-respected manager making the investment decisions can also attract investor interest, as can having particularly low charges.

The situation is further complicated by the fact these large funds don’t all concentrate on the same areas. In fact, they may buy into totally different asset classes.

Some of these portfolios will be focused on equities, some on fixed income. Then there are multi-asset products that embrace equities, bonds and alternative investments.

Quick guide: Is this approach right for me?

Consider investing in larger funds if…

  • You want to be in funds that are popular with other investors.
  • You want to be with a manager who has power in boardrooms.
  • You like the fund’s aims and objectives and they align with yours.

They can also differ in the way they manage money.

For example, active funds are run by managers who enjoy a greater degree of flexibility when it comes to buying and selling stocks.

Passive products, meanwhile, have far less scope as their role is to replicate and track particular indices.

An examination of the largest funds in the UK illustrates the point, with those focused on generating income sitting alongside multi-asset portfolios pursuing absolute returns.

This list also includes a number of UK stock-market trackers and even a portfolio that invests in large and medium-sized equities across the Asia Pacific region.

Passive funds can usually compete in terms of charges because they replicate particular indices, rather than being actively managed, so there are less costs involved.

In many cases, these can track a popular index, such as the FTSE 100, which gives people broad access to the largest UK companies, points out Mr Connolly.

“As the popularity of passive investments has grown, with more investors deciding it isn’t good value to pay the extra costs of active management, some passive funds have also grown large,” he explains.

Distribution channels can also play a vital role in influencing the size of an investment portfolio – especially in the current environment.

“If a fund is too big, it makes it hard to invest in small caps”

“All funds with aspirations to be larger need to be available on the main investment platforms,” adds Mr Connolly.

Many of them can boost inflows substantially by appearing on the ‘best buy lists’ of industry players, such as Hargreaves Lansdown.

Of course, there is always the possibility that a well-performing fund may continue to deliver, points out Darius McDermott, managing director of Chelsea Financial Services.

“However, funds can get too big, which means the manager has to change or tweak their strategy to deal with the extra assets – and then it doesn’t perform so well,” he says.

He cites the example of a multi-cap manager investing in the UK.

“If they get to a certain size, it makes it difficult to invest in small caps at that point as you would own too much of individual companies,” he explains.

Of course, the same golden rules apply with any investment.

Whether or not a fund is suitable will also depend on your goals, the length of time you’re willing to lock away money, and your attitude to risk.

Therefore, the best advice is to monitor a fund to ensure it still meets your needs and there haven’t been significant changes to its size, objectives or management.

“Keep an eye on performance and that the fund is still investing in the same style and strategy as it was when it was growing,” adds Mr McDermott.

Fund to watch: M&G Optimal Income

Richard Woolnough

This hugely popular fund, which aims to deliver income and capital growth, has more than £23 billion of assets under management.

Richard Woolnough has been at the helm of the portfolio since its launch back in December 2006 and is one of the most respected names in the industry.

A graduate of the London School of Economics, he boasts more than 20 years of experience in fixed-interest investing and has been with M&G since 2004.

The Optimal Income fund invests in a broad range of fixed income securities, governed by where he sees the greatest opportunities.

It may also hold up to 20% of the portfolio in company shares when he believes they offer better value than bonds.

Exposure to these assets is gained through physical holdings and the use of derivatives, with an in-house team of credit analysts on hand to help select individual bond issues.

Currently, the fund is 48.6% invested in investment-grade corporate bonds, with 26.3% in government bonds and 12.3% in high-yield corporate bonds.

As far as credit ratings are concerned, it has 38.1% in those rated BBB, with 23.7% in AA, 12% in AAA and 10.8% in BB.

Meanwhile, the largest issuers in the fund – excluding government bonds – are Verizon Communications (4%), Microsoft (3.1%), AT&T (2.8%) and Bank of America (2.1%).

Value of £100 invested in the fund over five years

Year*Year to date20172016201520142013
Fund percentage movement in year (%)-1.525.778.14-0.865.167.67
Value of £100** (£)126.46128.4121.4112.26113.23107.67

* To 22 October 2018 **The £100 was invested on January 1, 2013

ManagerRichard Woolnough
Launch date8 December 2006
Total fund size£23.2 billion
Minimum investment£500
Initial charge0%
Ongoing charge1.41% (including AMC)
Annual management charge1.25%
Performance feeNone
Contact details for retail

Rob Griffin writes for the Independent, Sunday Telegraph and Daily Express

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