Don’t get caught in an orphan fund

26th July 2013 by John Lappin

Savers in their thousands are losing out as a result of their own apathy and not ditching their investments in so-called ‘orphan funds’. It is a common theme and problem which has raised its ugly head again this week.

Speaking to specialist title, Investment Week, Alliance Trust chief executive Katherine Garrett-Cox asserted that the fund management industry is awash with underperforming investment portfolios, which do little to nothing for their investors in terms of delivering returns.

She said: “The industry is littered with orphan investment funds which do not hold enough assets and do not improve performance. Fund management groups constantly launch new funds but, as an industry, we are poor in terms of closing down products.”

She added that having too many funds merely confuses investors. Garrett-Cox has certainly walked the walked as well as talking the talk, because her firm has closed down its European and US funds in recent months.

In addition this week research from investment house F&C showed that just 2 per cent, or 25, of the 1,221 funds available to UK investors were top performers over the past 12 months, meaning there is billions invested in under-performing portfolios.

Fund management groups have had a tendency to launch funds, simply because the see a competitor doing so elsewhere. This me-too behaviour is not entirely bad news, certainly if the firm sets up the right structures and brings in the necessary research and fund management expertise. But clearly many do not.

It is also possible that fund management firms launch products that may represent a very good long term investment ideas, but they simply do not attract investors’ cash or the recommendations of influential brokers.

And there is another side to coin as well. Smaller, spritely funds can do well when they have less cash to invest. But those funds tend not to stay very small. Orphan funds rely on a great deal of investor apathy. It begs the question why does someone become interested enough in investing to select one of these funds but then forget about where they have put their money?

Another arguably bigger problem – which Garrett-Cox did not refer to – is the poor performance of some of the huge funds which were mostly sold by the high street banks. These are a constant feature on the various ‘dog fund’ lists published by influential broking firms designed to show up consistent poor performance.

These funds demonstrate, sadly, that where there is less competitive pressure, funds tends to underperform. Hopefully most Mindful Money investors are engaged enough not to accept poor long term performance from any sort of ‘orphan’ fund, and will vote with their feet. That seems to be the best way to keep fund managers on their toes.

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