Investments 

Unheralded top performers await advisers’ attention

  • Understand the benefits of investing in small funds
  • Learn about how small funds are performing
  • Understand the pitfalls for managers of small funds
CPD
Approx.45min
Unheralded top performers await advisers’ attention

There are two big reasons why advisers could be forgiven for assuming portfolio construction is all about asset allocation.

It’s an activity that has long been a major driver of returns, good or bad. On top of that, with many larger professional investors now using preset lists of funds they can use, picking the right product to execute asset allocation calls is no longer as big a part of the day job as it once was.

But it’s important to recognise that fund selection remains an important element of the process. This is particularly the case for both advisers and some of the discretionary fund managers to whom they outsource – and not just in the sense of picking managers who can beat the relevant sectors and benchmarks. 

For nimble investors like advisers and some smaller wealth managers, picking outperforming funds that have been overlooked by most in the investment space is a good way to differentiate portfolios, and can potentially generate the greatest returns.

As Money Management’s first feature on small fund standouts discussed last year, consolidation across the retail investment space, spanning advice firms but also discretionary fund managers, platforms and asset managers, means that money is concentrated in fewer hands than it once was. 

Larger wealth managers, in particular, now control too many assets to back smaller funds. Big players investing a meaningful amount of client portfolios in smaller strategies will quickly run into liquidity concerns.

Supply/demand

At the same time, there are still plenty of sub-scale funds out there. Morningstar research recently found that billions of pounds were languishing in “orphan” funds across Europe. 

These orphans were defined as products with a track record of at least five years but less than €100m (£86m) in assets, and net fund flows of €10m or less in each of the five calendar years to the end of 2017. Nearly 200 of these 3,751 funds were UK-domiciled.

Morningstar added that almost 80 per cent of these orphan funds were underperforming, according to its rating system, a sign that many investors were being disadvantaged.

“The sheer number of these [orphan] funds shows the industry has launched far too many funds that are unwanted by investors,” the report says. 

“And though the total level of assets in these offerings is small, our analysis shows that investors who have put money in them are often being disadvantaged.”

But not all smaller offerings lag in terms of performance. In an era of asset concentration and growing regulatory burdens, even outperforming funds can struggle to establish scale.

With that in mind, we’ve repeated last year’s process of identifying overlooked winners, with the aim of uncovering hidden gems across the investment universe. The data once again examines not just equity offerings, but those in the fixed income and multi-asset space.

Familiar faces

Table 1 details our findings in the equity space, with the top two overlooked portfolios listed for each major region. Table 2 outlines the results for bond, multi-asset and absolute return strategies. 

CPD
Approx.45min

Please answer the six multiple choice questions below in order to bank your CPD. Multiple attempts are available until all questions are correctly answered.

  1. What two funnds are said to have OCFs exceeding 1.7 per cent?

  2. According to Mr Stubbs, what is key to getting the most out of an underperforming manager?

  3. Mr Patel says that he may consider taking on a lesser-known fund if it had what?

  4. Which of the following statements is true?

  5. Which funds arew stated to carry the lowest charges?

  6. Which fund has the highest information ratio?

Nearly There…

You have successfully answered all the questions correctly, well done!

You should now know…

  • Understand the benefits of investing in small funds
  • Learn about how small funds are performing
  • Understand the pitfalls for managers of small funds

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