There can be a reticence among some advisers and fund selectors to recommend younger or smaller funds to their clients.
Many consider a three-year track record to be the bare minimum before committing money to a strategy, believing this represents the shortest timeframe in which a fund’s performance can be measured. Others are reluctant to back a fund with a low level of assets under management.
It is a sad fact large funds boasting many years in the market have proven to disappoint on many an occasion
While it is understandable untried strategies can appear high risk, to dismiss funds out of hand on arbitrary criteria can be short-sighted. After all, with the exception of those with substantial institutional or in-house seeding, all funds tend to start life with modest assets under management.
Conversely, it is a sad fact large funds boasting many years in the market have proven to disappoint on many an occasion.
Much can be said for backing a fund in its infancy when its management team is keen to prove its potential rather than protect past reputation. So, what should advisers bear in mind when assessing a relatively new fund? Maintaining a flexible approach to evaluation is key.
Take, for example, track record. While this provides some evidence by which a fund’s success can be assessed across a range of market conditions, a sub-three-year track record should not preclude a fund from consideration.
Have fund managers proved their mettle running money in a similar way in the past?
There may be other mitigating factors, which should be taken into account to offset this. For instance, have fund managers proved their mettle running money in a similar way in the past?
This may be an indication they can repeat this success with a newly launched strategy, in taking over a fund at a new fund group, or as lead manager of a team in which they have been an integral part.
It may also be the case the investible universe has been expanded: for instance, a manager may previously have managed European equities but subsequently taken over a new fund which can invest globally.
Platform availability can also present a barrier for wide support for a fund. However, the fact a strategy is not widely accessible does not mean it lacks potential.
It’s the classic ‘chicken and egg’ scenario – the platform requires more demand, the adviser has the demand but can’t use the platform
Frequently, newly launched funds, particularly from boutiques, are only available via a limited number of platforms, to be made more broadly available in due course.
It’s the classic ‘chicken and egg’ scenario – the platform requires more demand, the adviser has the demand but can’t use the platform. It is therefore important to keep these funds in scope, if only to make clients aware of usable ideas.
Similarly, low levels of assets under management need not always be an immediate deterrent. For some strategies – those investing in small caps, for example – this can be an advantage from a liquidity perspective.
So, a prudent stance is needed in considering appropriate levels of assets under management for the specific strategy and associated costs, which requires an objective, qualitative approach to assessment.
It is also important to consider a fund’s investor base. One which is diversified or is likely to grow with time should detract from any risks associated with having a limited number of large investors, which could impact a fund’s liquidity profile should there be large-scale redemptions.
Those running smaller, newer strategies are usually more accessible than their higher profile peers
All these factors should be considered alongside a qualitative assessment of the fund and its manager’s capabilities. Greater conviction can be built through meetings with fund managers or via webinars and presentations, and those running smaller, newer strategies are usually more accessible than their higher profile peers.
Backed by quantitative analysis, funds can then be monitored from a performance perspective as well as its growth in assets under management. The latter can be done in isolation and within the context of its sector providing prompts to trigger a review of its evolution.
By balancing aspects such as track records, availability, assets and resources in this way, advisers can make more informed decisions over less well known or relatively untested strategies.
This introduces an element of flexibility, which can help unearth funds with considerable potential for success. That is crucial because, in the ever-evolving universe of investments, dismissing funds based on a checklist alone may overlook their hidden power to deliver impressive returns in the future.
John Monaghan is research director at Square Mile Investment Consulting and Research
