Significant amounts of investors’ cash flows to just a handful of talented people in the world of fund management.
However, once a fund manager has built that all-important track record and attracted billions of pounds, the performance that follows can sometimes prove disappointing or mediocre at best. This could be attributed to the newfound pressure on the manager or the fact that running a significantly larger portfolio has caused them to adapt or compromise their investment style.
Whatever the reason, many suggest there are benefits to backing a fund from an early stage – particularly if you have done your homework. But this is not always easy for wealth managers and discretionary investment managers because some are unable to invest in funds that have less than £100 million under management or have a track record of less than three years.
Rob Burdett, co-head of the multi-manager team at BMO Global Asset Management, suggests that these restrictions cause private investors to miss out on the stellar returns that can be generated during the early stage of a fund’s life or a fund manager’s career.
“You should invest in funds as track records are created, not lived off. Often, good funds reach their capacity limit before three years. We think smaller funds are a good area to focus on because people ignore them to make life easy or because of the structure of their business, but they are potentially missing out,” Burdett explained.
So, where do the best opportunities lie? Here, we highlight five funds that are less than £100 million and have the potential to perform in the future. It is worth noting that without a longer track record investors should be aware they are taking on risk – fund managers that have invested for at least three years have not tested their method through the market cycle.
Investec UK Equity Income
Nick Watson, a multi-asset manager at Henderson Global Investors, highlights this UK equity income fund as one to watch. It was launched in January of last year and is managed by Blake Hutchins, who joined Investec Asset Management from Threadneedle for the launch of the fund. The portfolio is currently £32 million in size and has returned 20.6% over the past 12 months, which compares to 11.9% by the average fund in the Investment Association’s UK Equity Income sector.
Watson likes Hutchins’ focus on quality businesses that generate high and sustainable levels of free cash flow.
“This quality growth style of investing has performed well amid the current muted economic growth backdrop. However, it is also worth observing that the portfolio generates a competitive historic yield of 3.7%, from a portfolio with a different and complementary character to many of the large established value-orientated UK equity income competitors,” Watson noted.
Baillie Gifford Japan Income & Growth
Managed by Matthew Brett, this fund was launched at the beginning of July 2016 to benefit from the changing attitudes towards dividends within corporate Japan. Gavin Haynes, managing director of wealth manager Whitechurch Securities, bought into the £52 million fund on account of Baillie Gifford’s established expertise in Japanese equities.
“We will use the fund to provide core exposure to Japanese dividend stocks as part of a diversified global equity income strategy,” he added.
This newly launched open-end fund may not yet have even one-month of track record, but Baillie Gifford run a successful five-star Baillie Gifford Japanese fund and a Gold Rated closed-end fund the Baillie Gifford Japan Trust (BGFD).
Babson Capital Emerging Markets Debt Blended Total Return
Burdett and his team bought into this fund in June of this year as part of a broader shift into emerging markets, following a period where they were underweight in comparison to the index.
“Emerging market debt and equity looked optically cheap for some time. We then felt we reached a point where people were more prepared to accept the risk for the returns being offered. Babson is a company that has a real focus on this area,” Burdett said.
Over the past year, the emerging market debt fund has returned 9.5% versus 8.3% by the sector average. It is currently $63 million, or £48 million, in size.
Sanditon UK Select
This £77 million fund is managed by Tim Russell, who carved out a successful reputation running long-short UK equity funds at Cazenove Capital Management which is now part of Schroders. Russell is able to take long positions in stocks where he sees upside, whilst also taking short positions in stocks where he identifies negative prospects.
Andrew Wilson, head of investments at wealth manager Towry, highlights Russell’s experience and the calibre of managers that surround him at Sanditon: namely, Chris Rice and Julie Dean.
“In a low return world, market neutral strategies will prove incredibly attractive to asset allocators, and Tim Russell has the experience and track record to suggest that he will be one of the safest pairs of hands in that environment,” Wilson explained.
The fund has returned 2.7% since launch in December 2014, which compares to 3.7% by the Investment Association’s Targeted Absolute Return sector average.
Cullen Emerging Markets High Dividend
Over the past year this fund has returned 32.6%, which compares to 29.9% by the emerging market equity peer group. Sarasin & Partners’ fund of funds team invested in the fund in April of this year and were drawn to the healthy dividend yield on offer.
“Cullen has a strong record of income investing and this fund yields 4.5%, which is obviously very attractive in today’s environment,” commented Lucy Walker, head of third party funds at Sarasin.
