Holly Cook: We're here at the Morningstar Investment Conference and I'm joined by Clive Beagles. He is Senior Fund Manager at J O Hambro. Clive, thanks for joining me. You just gave us a presentation which I thought was particularly interesting on actually limiting fund size. Can you explain, why would a fund manager want to actually limit the size of their fund?
Clive Beagles: It may sound counterintuitive in a way, but I think ultimately it's easier to perform with a smaller pool of assets. I think a lot of fund managers over the years have been very successful, but in the end, their fund has been allowed to grow to such a size, they can't effectively manage it. That doesn't mean that we're a fund that wants to turn the portfolio every month or every quarter, but when we do move, we want to move effectively and reasonably quickly. I think a lot of funds have become so large that actually they get rather stuck in a certain position from which it's very difficult to change strategy, even if the events around you begin to look a little bit different.
Cook: So what sort of factors might define at which level a particular fund should be kept?
Beagles: It will vary. The way we've thought about it is we like to have almost half the fund invested in small- and mid-cap stocks. Why? Because we think they're more poorly researched, the scope for them to be mis-priced and undervalued is higher than some of the large cap stocks. So, we want to have the fund at a size where we can meaningfully own stocks, so they can be maybe 1% or 1.25% of the fund, but actually not find ourselves owning more than 4% or 5% of an individual company's equity, because it then gets difficult if you want to change your mind. Again, that's my point, we're not doing that overly frequently, but occasionally, things do change and you might want to be able to move.
So that really has influenced our view that we want the fund to be sort of £1 billion or slightly below a £1 billion, we set the capacity around £750 million, but that was six years ago and markets are about 30% higher since then. That equates to around £1 billion. There's nothing magical about that number. I guess, it's different for different individuals, it’s what works for us. Other people may be very comfortable running a lot more than that, but I think everyone should in their own mind have a view about what's the maximum they think they can run effectively, and I fear people don’t give that as much consideration as they should.
Cook: So do you think that there’s maybe an optimal size at which a fund can be, or does it change according to maybe U.K. equity versus global equity, or…
Beagles: No, it varies a lot. I remember when I was working at Newton, I was working with Helena Morrissey, who's now Chief Executive of Newton. One day she said, “this is ridiculous, it is unbelievable, there's no liquidity in my market.” I said, “what?” She said “I can only sell £10 million worth of U.K. government bonds,” and I was like, “welcome to our world.” That's so different from our world, where there might be a day which literally a stock is undealable.
In 2008, there were days or weeks where you couldn't sell any, literally there was stock that was non-traded. So clearly it varies. I guess in our space, in U.K. equity income space, there are some large multi-billion pound funds, they're very well known, I don’t need to name who runs them or what they are, they’re very well known, but I think some of them are in danger of having got a little bit too big for their own marketplace.
Cook: So, on the flip side, for an investor who's looking to invest in funds and perhaps they're paying attention to fund size, is there perhaps a minimum level? Can a fund be too small to perform well?
Beagles: No, but if it's very small then I guess the charges eat into the performance more each year. So, if a fund is a very small £10 million or £20 million fund, at that point, the fixed charges, if you like, that all funds have to bear, will eat into the performance.
Having said that, small funds often perform quite well. New funds, when they launch, often the strongest period of performance is in these first two or three years, and that's just because people can move money around more quickly, more effectively than when they're running a larger fund. So, I actually wouldn't dismiss small funds, but I think you do need to be careful, a) about how much the charges are eating into performance. And secondly, is it a small fund that's owning very, very small companies because is that strategy replicable as the fund grows? And it may not be or it may be, you may have a small fund that's simply got the same sort of asset allocation by size as a fund like ours might have, but some might just be concentrated on micro-cap companies that they couldn't own if the fund quintupled in size, for example.
Cook: Thanks again for joining me, Clive.
