Head of Investment Fund Research
We regularly see stories highlighting the trend of some fund selectors towards the biggest funds in the sector. While it’s true that we own some of the more popular funds, we are also not afraid to look at the opposite end of the spectrum and seed or buy into smaller funds.
What’s the investment case for smaller funds?
Several studies have found that performance tends to tail off as fund assets grow. Larger funds may find it more difficult to buy and sell positions quickly and may be more restricted in the size of companies they can buy as assets grow. Positions may need to be bought and sold more slowly, making it difficult to capture as much of the upside as a smaller fund, which can be more nimble in and out of positions.
How to spot winning fund launches
New launches come with their own challenges of course. The most obvious of these is the potential lack of a track record. In some cases, very good US or Asian based managers might not have a presence in Europe, so decide to launch a small fund to mirror in Europe. This is a fairly easy decision on whether or not to invest. We can easily analyse the manager’s performance and stock trading from the longer history take account of any potential differences in the strategies.
Where there is no track record, we may need to do background work to understand how the new fund will perform. This could be the case if a manager has moved investment house, or a manager we rate highly is launching a new strategy. In these cases the advantage can be in investing early before the fund grows too large.
Baillie Gifford: a case in point
The most recent fund that we helped to launch was the Baillie Gifford Japan Income Growth Fund. We have a high opinion of Baillie Gifford’s Japan team, and this fund offered a slightly different style make-up to their more growth orientated offerings.
Baillie Gifford were partly able to do this because Japan has enough companies which are delivering both strong earnings growth and reasonable dividend yields. We saw the new fund as an attractive way to gain exposure to rising Japanese dividends and the greater focus on shareholder returns in Japan. So far the decision has been a good one as the fund is over 5% per annum ahead of index since launch.
The key to finding these opportunities is a good network of contacts that enable the team to hear about the launch first. Recent examples included the BNY US Income Fund, run by BNY affiliate The Boston Company, and the Sands EM Growth Fund, a European version of their successful US franchise.
Getting in early allows you to influence the final product
The other advantage of having good relationships is that we’re often consulted on new potential products. This is particularly the case when a fund group is in ‘pre-marketing’ consultation mode. But if we do want to influence the final product, we have to have a strong interest in it, as our comments carry little weight otherwise.
For all the funds we seed or invest in, we also seek a preferential fee arrangement to benefit our clients and provide them with the best chance of outperformance. With so many passive options available, lowering the cost of active management is a useful way of levelling the field.
As fund selectors, we are being challenged more and more to prove our worth versus a quantitative screen. Face to face meetings are always important to go beyond statistical analysis, but they also offer the ability to seek out new opportunities, whether that be long tenured managers launching in the UK, or the next generation of investment stars. Buying in early to those opportunities ultimately leads to better returns for investors.
Speak to an Investment Manager today to find out how we can help you with your investment objectives.