Just one out of eight former blockbuster funds analysed by Morningstar beat its benchmark in the period immediately after ranking as Europe’s biggest fund. © Bloomberg

Blockbuster funds that previously ranked as the largest in Europe have undergone a spectacular downfall over the past decade.

Former star funds managed by investment groups including Standard Life Aberdeen, BlackRock and Franklin Templeton have shrunk to a fraction of their former size after losing favour with investors as quickly as they earned it.

SLA’s well-known Gars fund, a multi-asset strategy that ranked as Europe’s largest fund as recently as 2017, when it managed a combined €38.6bn, now has just €4.5bn in assets, according to Morningstar, the data provider.

Franklin Templeton’s Global Bond fund, run by veteran fixed income investor Michael Hasenstab, has had a similarly pronounced fall. After dominating the investment industry in 2014, when it had €30.2bn in assets, the fund now stands at just €7.7bn.

BlackRock’s Global Allocation fund has shrunk from €35.8bn to €12bn in just three years, and Carmignac Patrimoine, run by veteran French investor Edouard Carmignac, stands at just €10.8bn, down from €30bn at its peak.

The trend underscores how popular funds’ sharp growth can also lead to their undoing. Investors pile in when managers perform well, but when funds grow to a large size, their returns tend to drop off, resulting in outflows.

“Large funds are vulnerable to boom and bust dynamics,” said Morningstar’s Ali Masarwah, who carried out the research. Not only do giant funds drive up the valuations of the securities they buy, which makes future outperformance more unlikely, they are also less flexible than smaller funds due to liquidity risk considerations, he added.

Just one out of eight former blockbusters analysed by Morningstar beat its benchmark in the period immediately after ranking as Europe’s biggest fund. The data excluded money market funds.

Separate research from data company Broadridge found that only a quarter of the 100 best-selling active funds in Europe continued to attract positive investor flows three years after peaking in size. “Today’s flow winner is tomorrow’s loser,” said Chris Chancellor, senior director at Broadridge.

The findings come after Pimco’s €57bn Income fund lost its place as Europe’s largest fund last month after taking a hit during the market sell-off sparked by the coronavirus pandemic.

The fixed income product run by Dan Ivascyn, the “bond prince” who replaced Bill Gross at Pimco, lost €22bn in March because of a mixture of negative market movements and investor outflows.

Pimco Income now ranks behind Swedish equity fund AP7, which took the top spot after being boosted by the rally in global stock markets during the second quarter.

The Pimco fund’s performance has improved in recent months but investors have not piled back in at the same rate as before the March rout, said Mr Masarwah. He suggested that some investors were diversifying away from the fund because of concerns over its large size.

“Big is not always beautiful,” said Mr Masarwah. “Letting funds grow too large may be in the interests of fund companies but it is not in investors’ interests.”

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