Interactive Investor

Don’t be shy, ask ii…what happens when a fund shuts down?

18th March 2021 08:55

Kyle Caldwell from interactive investor


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No question is a stupid one, so whether you want to find out what you need to do to start investing or how the stock market works, don’t be shy, ask ii.

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Bernard Huggon asks: what happens when a fund manager decides to withdraw a fund, for example, the Vanguard Global Momentum Factor UCITS ETF?

Kyle Caldwell (pictured above), collectives editor, interactive investor, says: Fund closures typically occur due to one or both of the following: persistently poor performance and a low amount of assets owing to a lack of investor interest.

Fund management groups tend to offer investors a range of options. It may decide to merge the fund with another of its funds, particularly when it has a similar investment mandate. In this instance, investors will be given the choice of whether to do so or not. Those that do not act will be switched, although you can, of course, sell at any time.

In the event of a planned fund closure, even if there is no merger, fund management groups will usually offer a fund alternative (one of its own) for investors to consider in an attempt to keep them. This is particularly the case with big fund management companies that have dozens of funds or exchange-traded funds (ETFs). A boutique firm, however, that has only one or a handful of funds, may not have a suitable alternative. 

For funds that simply redeem, investors will be notified when the fund will be closed down and told when (if they have not already sold in the meantime) their money will be returned to them. It typically takes a couple of weeks following the final dealing day for investor money to be returned.

In the case of Vanguard Global Momentum Factor ETF, it was delisted at the end of February and investors were told their money would be returned on or around 11 March. Three other ‘smart beta’ ETFs were also closed by Vanguard on the grounds of having a low amount of assets that were deemed sub-scale. They were Vanguard Global Minimum Volatility ETF, Vanguard Global Liquidity Factor ETF and Vanguard Global Factor ETF.

In the case of investment trusts, the same process applies. But one difference is that some trusts have continuation votes. If investors vote to wind up the company, shareholders are paid their share of the company’s assets at or near net asset value (NAV) rather than the current share price.

As well as funds closing for having a small amount of assets, funds can also stop accepting new money from investors if the size of the fund starts to compromise how the fund manager invests. If the fund has simply become too large, it can ‘hard close’, which blocks new investments being made. More common is a fund ‘soft closing’. In this instance, barriers are put up to deter new investors, most typically fund managers levying an initial charge.

Funds hard close or soft close primarily because the funds asset base is getting too large to effectively execute its investing style.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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