Soft closure

Why do funds soft close?

Historically, the nature of a unit trust was to expand and contract in-line with the performance of its portfolio and the popularity of its sector. A fund manager’s portfolio would increase as new money flowed into their funds and they would have a large amount of spare cash to invest. Conversely, when their funds fell out of favour, they would sell assets in order to meet the redemptions.

Times have changed and we have seen an increased use of closing a fund, in one way or another, to assist in its management.

Soft closing or hard closing?

Fund managers may choose to ‘soft’ or ‘hard’ close a fund. With a soft close, technically, it is still possible to invest, but it is usually made unattractive to do so. Generally, a fund provider will levy charges on a fund in order to deter investors. These charges can include the removal of any discounts the manager may offer to intermediaries. Regular savers are usually unaffected by a soft closure and can normally continue to contribute into the affected fund.

With a hard close, the fund provider will simply not accept any new money into a fund.

Why does this happen?

One school of thought suggests that when a fund gets to a certain size, the market can see what the fund manager is doing. So a manager cannot nip in and out of the market undetected.

Most of the time, soft or hard closing a fund is not necessary, however, in some specialist areas there might be a good case to close. The UK Smaller Companies sector is a good example of this. A fund manager may not have difficulty finding many companies to invest in when the fund size is at £500 million but may do if the size reaches £1-2 billion. In this situation, the fund manager may decide to soft close the fund until it reaches a manageable size.

Should I be concerned if my fund has been soft or hard closed?

No, there is no cause for concern. Your interests will continue to be looked after by the fund manager. However, as with all your investment, it is wise to keep a keen eye on it to ensure it continues to meet your needs.