Navigator Research today released findings on how small companies funds perform once they have closed to new investors.
Navigator Research today released findings on how small companies funds perform once they have closed to new investors.
According to Stuart Fechner, Navigator research manager, relative performance of these funds can drop off once a fund closes. "In the past three years funds offered by ING, JBWere, Perpetual, Portfolio Partners, Investors Mutual and Equity Trustees have been closed."
At the end of May, the Challenger Smaller Companies Fund and Investors Mutual Future Leaders Fund closed to new investors.
Commonly, the funds are closed when they reach a certain size, often around the $500 - $600 million level - approximately 1% of the small cap market. This level of fund size is seen as being a point where capacity is reached, and therefore where the manager feels they can still achieve the desired level of return for investors within the small cap sector of the market – commonly those stocks outside the S&P/ASX 100.
However, the table below, indicates investors have not always benefited by the relative performance achieved by the fund after it has closed.
The table provides the one-year return for several small company funds now closed to new investors. The date of closure is indicated in the final column and further highlighted by the performance number in blue, indicating the closure within the respective twelve month period. The relative performance ranking in each year is indicated by the quartile ranking (Q1 - 4).
All rates of return shown are before management fees and do not take into account any specific individual tax position. Quartile ranking sourced from Mercer Wholesale Performance Survey – Smaller Companies Universe. Q1 represents the funds performance being ranked in the top 25% of funds within the Mercer survey during that period. Q4 represents the funds performance being ranked in the bottom 25% of funds within the Mercer survey during that period.
When assessing performance it’s important to examine whether the closure of a fund affects subsequent performance or if a fund’s closure and its performance have some other common cause.
Firstly, when a fund closes to new investment, thus reducing inflows, the task of actively managing the fund is more difficult. "With no, or significantly reduced inflows, more shares would have to be sold in order to make new stock purchases within the fund. The impact would be higher turnover within the fund, which usually means increased costs that could reduce performance," comments Stuart.
Or, a few good years of performance could actually increase the fund’s inflow, causing the fund to then be closed. Then subsequent under-performance of the stocks within the fund may be more likely after such a good run, therefore causing poor relative performance.
"It’s difficult to be sure how directly a fund’s closure impacts upon it’s subsequent performance. However, there are a couple of key lessons for investors to take on board when determining investment selection of small company funds," says Stuart.
"While impossible to guess the timing of a closure, it is important to identify the size of the fund given several have closed at around $500 - $600 million," Stuart said. "Also note 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," adds Stuart.
"It is equally, if not more so, important to remain mindful of the key points fundamental to investment within any sector. It is essential to identify how a fund is managed and whether or not it is appropriate for an investor’s risk profile and timeframe of investment. Then once an investment is made, it is essential to continually monitor and review it, both in open or closed funds."
A financial adviser can provide further information on the suitable funds for a person’s investment plan.
-end-
Stuart Fechner is available for interview on 0407 839 080.
For further information, please contact:
Simon Morgan, Group General Manager, Public Affairs
tel: (03) 9829 8892
mob: 0407 966 632
Notes to editors:
- Aviva Australia is a group of two specialist financial services companies: Navigator and Norwich Union Life Australia Ltd. Portfolio Partners, the Australian funds management arm of Aviva plc, is a sister company. Through these companies we provide products and services in the areas of wealth creation, wealth management and wealth protection for more than 300,000 customers throughout Australia
- Globally, Aviva Australia is part of Aviva plc, the world’s seventh largest insurance group, the largest insurer in the UK and one of the top five life companies in Europe. Aviva was formed in May 2000 through the global merger of CGU plc and Norwich Union plc
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- The information in this document reflects Norwich Union Life Australia Limited's ('NULAL')/Navigator Australia Limited's ('Navigator')/NULIS Nominees (Australia) Limited's ('NULIS') understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances. The securities advice or information given in this document is of a general nature and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances
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