Whatever your view on the market ruptures of recent weeks, the growth of the funds industry is heading in only one direction. That’s translated into portfolios themselves expanding and, in some cases, eventually soft-closing.
But what of funds that, for whatever reason, have yet to shoot up in size? Should we be taking a closer look at them?
You don’t need me to tell you that standing out from the crowd is becoming increasingly important for fund selectors – or at least, it should be. Most intermediaries are now aware of the need for differentiation, and there are tentative signs this is leading to a wider range of fund choices.
But it is still taking time to make itself felt. Just take a look at the latest report from The Lang Cat consultancy, which found that the concentration of holdings remains such that “very few DFM portfolios… can claim to have a ‘unique’ or ‘individual’ offering”.
The problem, as ever, is particularly acute for smaller products, their quest to reach critical mass hampered by big buyers’ concerns. For these selectors, a small initial investment would mean the fund cannot contribute meaningfully to portfolios. A greater amount would risk them becoming an overwhelmingly large part of the shareholder base.
There’s no denying that behavioural instincts encourage investment in larger fundsThere are some partial solutions. Founder share classes, offering discounted entry to funds at an early stage. Platforms could do more to help smaller products. And there are signs of progress in the investment trust space, as we report in this week’s issue: despite liquidity concerns, investors appear slightly more willing to look at trusts under £100m in size.
All this said, there’s no denying that behavioural instincts encourage investment in larger funds. Call it what you will: a herd mentality, safety in numbers, or even ‘no one ever got fired for buying Neil Woodford’.
The reverse of this is that buying a smaller fund can feel riskier, irrespective of its actual attributes. They don’t have the accolades of their larger peers. They sometimes don’t even have the longer-term track records. But it’s reasonable to think they will become more valuable to portfolios in future.
This isn’t just because of the importance of diversifying. There is also an increasingly prominent school of thought that states that the best returns can be made at the beginning of a fund’s life. So Investment Adviser is going to be increasing its focus on these unheralded offerings in the coming weeks and months.
We’ll be attempting to unearth these hidden gems, and ultimately identify the best of them on a qualitative and quantitative basis. Some buyers may prefer to keep their fund secrets to themselves, and there’s no harm in that. But if readers have suggestions, I can be reached on dan.jones@ft.com.
Let’s shed some light on these unknown winners.
Dan Jones is editor of Investment Adviser
