Swiss asset manager GAM issued a profit warning in June, its fourth in two years. It’s been a tricky few years for the firm: a fund manager scandal in 2018 prompted it to close nine absolute return funds with £5 billion in assets and return the money to investors. Outflows have dented the firm’s assets under management and the shares have gone from 20 Swiss francs five years ago to SFr2 today.
Investors in the company’s shares may be anxious, but should those with money in their funds be worried too? How safe is your money when you invest in a fund if the firm that runs it gets into financial trouble?
Should I Worry About Outflows?
One feature of open-ended funds is that investors buying and selling creates inflows and outflows, which Morningstar monitors every month to see which funds and asset classes are in and out of favour. The largest asset management firms can ride out outflows as assets under management (AUM) wax and wane depending on the success of certain funds and styles. Tech and growth are hot areas at the moment, for example, attracting inflows, while value and equity income are out of favour.
Sometimes the wave of outflows becomes a serious problem that threatens the sustainability of the company itself, as in the case of Woodford Investment Management. In that example, the main equity income fund was wound up with some money returned to investors, the investment trust was taken on by Schroders and the Income Focus fund was snapped up by Aberdeen Standard.
This shows how even when a fund fails, it doesn't necessarily mean a fund will be wound up if another firm is interested in taking on the mandate. In this case, while investors don't need to be concerned about the fund business closing, they will want to do some research into the strategy of their fund under its new manager.
Another scenario, says Morningstar Investment Management portfolio manager Mark Preskett, is that when a fund company enters "mass outflow mode" its rivals may swoop to buy the company. One example of this is New Star, which was spun out of Jupiter and floated on the stock market, only to get into financial trouble and be bought out by Henderson in 2009 for £115 million.
Checks and Balances
One other important aspect of open-ended funds is the role of the authorised corporate director (ACD), which is involved with the day-to-day management of the fund. There is also a depository which is independent of the fund firm and takes safe custody of the assets. These independent roles help prevent fraud and keep investors' money ringfenced away from that of the firm.
"The structure of funds means that investors money is held separated from the business itself, it's only if there was an extreme case of negligence or fraud that the money would at risk," says Adrian Lowcock, head of personal investing at Willis Owen.
And Darius McDermott, managing director of Chelsea Financial Services add: “If ABC asset management went bust tomorrow, it might lead to suspension of assets, but it shouldn’t lead to loss, unless you’re invested in things that are going bankrupt”.
As people invested in property funds have discovered, one of the most obvious risks for open-ended fund investors is not being able to access your money when you want. M&G Property, for example, has been gated since December 2019. The Financial Conduct Authority is looking again at whether these funds provide enough liquidity for investors who want to buy and sell their fund units every day.
How Healthy is Asset Management?
While March saw a sudden bear market and the worst market losses in decades, fund management groups are not in immediate financial peril. According to Morningstar data to the end of June, assets under management jumped by €77 billion to €336.8 billlion in the second quarter. In the UK, companies such as Liontrust and Polar Capital have reported big jumps in their assets under management.
McDermott says the fund industry has been relatively unscathed by the coronavirus crisis, in that companies can still charge fees on their funds even during badtimes, which provides a steady stream of income for the business.
Investors worried about the health of fund companies can also look at the Morningstar Parent Rating, one of the key metrics used in the Analyst Rating given to funds. Annnouncing the latest edition of the Top 100 Fund Families report, analyst Samiya Jmili says: "In our view, firms that put investors first and align their interests with their shareholders will succeed in the long run."
With many listed companies scrapping or cutting dividends this year, some fund companies have gone against the tide too - for example, M&G (MNG) said it will pay its ordinary and special dividends this year.
Returning to GAM, McDermott thinks the fund firm has turned the corner after 2018's problems and has done the right thing by investors: "It has behaved extraordinarly well, found this problem and dealt with it. You don't find asset managers returning £5 billion to clients easily."
