Small bets, closed funds

Small bets, closed funds

Several French asset managers have closed their European micro and smid cap funds throughout the year while have launched reshaped funds. InvestmentEurope reports.

What Oddo BHF Asset Management, Amiral Gestion, Financière de l’Echiquier, Raymond James Asset Management International and Groupama Asset Management have in common is not only that they are Paris-based, but also that they have soft- or hard-closed their European small-mid caps strategies throughout 2017.

Oddo BHF is the latest example, having closed its Active Smaller Companies fund to new subscriptions after it applied a 5% fee to new investors’ tickets, and then reached the €580m cap by mid-October. It aimed at preserving performance and the liquidity of the fund, which will be reopened when assets under management fall below €580m.

Prior to its closure, the fund recorded inflows of €300m over the ten first months of the year. Agathe Schittly, head of Marketing at Oddo BHF, lists three drivers that have benefited the fund: the investors’ appetite for European small caps, the performance of the asset class and peers having closed their funds earlier in 2017.

As European small caps products seem to be in favour among investors, the manager decided to launch the Oddo Active Micro Companies fund on 7 August, managed by Guillaume Chieusse and holding 60 stocks: each with a market cap between €75m and €750m. The lack of a size threshold for Oddo BHF’s European micro-cap fund means it might close when inflows reach €150m, Schittly says.

Meanwhile, Raymond James Asset Management International’s RJ MicroCaps fund co-managed by Louis de Fels and Edwin Faure, was hard-closed at €60m at the end of 2016 – more than nine years after inception – with a soft-closure at €55m. As of end of September 2017, the fund’s AUM totalled €63m.

“The soft-closing is key for us as we want to keep the promise made to our stakeholders, which is to invest exclusively in micro caps – market cap under €300M – and to provide the best risk-adjusted performance. We have targeted a minimum 7% annual return on the long run, and we are happy to say that we are performing above 10% annually since the fund’s inception.

“Speaking of microcaps, there is an issue of liquidity: the bigger the fund gets in assets size, the more difficult it is to buy/sell stocks, therefore reducing its flexibility. Hence fund managers tend to increase the average market cap of their stocks to cope with that phenomenon – and therefore moving away from their initial investment universe.

“During our 10-year journey in the microcaps landscape, we had to navigate through illiquid markets, such as in 2008 or 2011; therefore, we know by experience that the €50-60m size in AUM is a milestone for the fund’s flexibility. Even though this closing was not an easy decision, we had to make it,” explain de Fels and Faure.

According to the duo, three main reasons have led smid caps funds to soft-closed recently. In addition to the liquidity issue, RJAMI’s fund managers highlight the impact of inflows in these funds on valuation. The important level of net new money boarded has driven small caps to high valuations, they suggest.

Volatility has played its role there too. For de Fels and Faure, small caps tend to be more volatile stocks but they note that with the different quantitative easing policies, they became less volatile.

The pair sees this as an artificial phenomenon and thus expects volatility to come back on the middle term.

To satisfy investor demand after the closure of the fund, RJAMI has offered alternative investment solutions throughout its fund range, which includes the Raymond James SmallCaps and the Raymond James Europe Flex strategies.

The former was launched in 2014 to anticipate the soft closure of the RJ MicroCaps fund and aims to follow microcaps companies during their growth phase, even when their market cap exceeds the €300m limit of the manager’s micro caps selection.

“Thus, the RJ SmallCaps fund invests in eurozone companies between €300m and €2bn market cap; it is run by the same management team and embraces the investment processes; in a nutshell, it is the big/small brother of the MicroCaps fund,” add de Fels and Faure.

As for the Raymond James Europe Flex fund, launched on 29 September 2017, it can be invested between 0% to 100% on European equities, across all capitalisations sizes, therefore enabling more diversification and flexibility. The fund applies the firm’s cross thematic approach, as stocks are picked in function of the major themes highlighted in RJAMI’s global macro-economic scenario.

Another manager to have anticipated the soft-closure of its European smid cap fund was Groupama Asset Management.

The firm soft-closed its G Fund Avenir Euro fund managed by Cyril Carrière in May 2017 when it limited subscriptions of existing and new investors by applying a 10% maximum subscription fee for any additional subscription.

“We have no mirror fund, as the soft-closing decision was mostly driven by the sourcing situation. Anticipating this situation, in 2016 we launched G Fund Avenir Europe, to widen the sourcing to the Europe area, opening it up especially to the UK and Swiss markets,” says Thierry Goudin, head of business development at Groupama AM.

He added that clients still interested in that fund are being directed to invest in the G Fund Avenir Europe, which has at least two-thirds of its assets invested in European smid stocks. Goudin explains that the re-opening of the fund to investors will depend of the reasons for the decrease in AUM.

“If the decrease comes from market movements, the dispersion rate and sourcing issue would remain the same. So, we would not re-open the fund from a commercial point of view.

“On the other hand, if the decrease is due to redemptions from clients, we would probably re-open the fund when the AUM reach €1bn,” he argues.

In recent months, a few French managers have launched European smid cap products to grab their share of investor appetite for the asset class, such as Dorval Asset Management and CM-CIC Asset Management.

Nantes-based boutique Portzamparc Gestion has totally reshaped its Portzamparc Actions Europe launched in 1987 and originally focused on European large caps.

The fund was renamed Portzamparc Gestion Europe PME as from 22 September 2017 with a new focus on European small- and mid-caps – at least 75% of the fund’s assets are invested in stocks of companies PEA-PME eligible (French savings equity plan supporting investments in small and mid-caps) and having their headquarters in the European Economic Area.

Companies picked in the fund shall also have a turnover of less than €1.5bn or a balance sheet that does not exceed €2bn; have a market cap valued at less than €1bn on stock exchanges; employ less than 5,000 individuals and pay corporate taxes.

Karim Jellaba, head of Business Development at Portzamparc Gestion, explains that the fund was not matching the strategy and the DNA of the firm anymore as it wanted a repositioning of its offering on listed smid caps. Instead of scraping the fund, the manager gave it a second life and fully assumes its declared ambition of attracting inflows by repositioning it on the segment.

“The fund currently totals €32m of assets. It remains too early to set up an AUM size threshold that would lead to the hard closure of the fund. However, we will monitor closely and constantly the fund’s liquidity through the flow ratio,” says Jellaba.

“A fund closure is not a problem for us as we have already acted this way for our French smid cap equity fund Portzamparc PME in January 2017,” he adds.

This article was first published in the November 2017 issue of InvestmentEurope.