In this very retro world of high interest rates, how are fund managers innovating these days?
Of course such a macroeconomic world is, in theory at least, supposed to play into the hands of value funds.
This should be an oasis in the desert for these funds, after the extended environment of low rates saw value funds, managers and even entire fund houses fall by the wayside.
So Asset Allocator thought it would be interesting to find out which funds came to market since 2019 and the types of style they were incorporating.
Thanks to the whizzes at Morningstar, they’ve provided us with some data on the types of equity funds and ETFs launched in the IA classified universe over the past five years.
For those unfamiliar with the Morningstar Style Box, it’s a pretty little cube that categorises funds based on their investment style and market cap size – a noughts and crosses grid for fund managers, if you will.
Or, in their words:
“By providing an easy-to-understand visual representation of stock and fund characteristics, the Morningstar Style Box allows for informed comparisons and portfolio construction based on actual holdings, as opposed to assumptions based on a fund's name or how it is marketed.”
Without further ado, here are the results:
When totalled up, there have been 55 value fund launches, 209 growth launches, and 227 blended launches across all capitalization sizes. The curiosity here is that a number of the most prominent value fund managers have left the industry in recent years, suggesting either there ought to be a gap in the market for such funds.
As you can see, blended funds dominate large-cap launches, while growth funds dominate the mid-cap space.
Value funds have been out of favour for a long time, and if the Morningstar indicator is anything to go by, growth and blended funds are the products that will form most of the investable equity universe in the years to come.
Mark Preskett, a portfolio manager at Morningstar, pointed to the fact that value's respite was only "brief" and that we have swiftly returned to a growth-led market.
He said: "In a world where the lion’s share of new money is being invested into passive funds, fund groups need to be prudent with new launches.
"With growth stocks showing such outperformance over recent years, it takes a brave fund group, with deep pockets, to get behind a value offering."
What is perhaps most interesting from the data is the dearth of fund launches over 2023 and into 2024.
On first count, there were just 36 UK-domiciled equity fund launches (of all styles) last year, compared to 117 in 2022.
Our sister titled, Ignites, also found that overall launches have fallen for the fourth consecutive year.
James Penny, CIO of Tam Asset Management, remains confident in managers’ abilities to continue innovating, even as industry consolidation bites.
“The competition for slots on a smaller number of buy lists is going to push asset management firms to be more creative on strategies and on pricing to make sure they have a long-term seat on a smaller amount of buyer lists,” he said.
“So, you know, there's going to be more competition to innovate. People will always innovate, and I think perhaps the DFM world is coming round to the idea that there are some really, really good funds out there looking for help with really experienced managers at the helm, or really innovative new ideas that can be seized upon for the benefit of the end client.”
In a recent chat with Asset Allocator, Penny revealed how he often invests in new funds from the outset, which offers easier access to the managers of tomorrow at a discounted rate. This is a process you can read more about here.
