James Burns, who jointly runs the £495m Smith & Williamson managed portfolio service for financial advisers, is seeking “the £200m funds that can turn into £2bn funds”, rather than the largest and best known funds on the market.
Burns said he has “never owned a Woodford fund” or the M&G Optimal Income fund, which at one time was the largest fund in the UK retail market.
He sees it as his job to identify the future stars, rather than buy the big name funds of today, which most advisers would already be able to identify.
He said he prefers to pick fund managers that have a clearly identifiable process, even if the style favoured by the manager happens to be out of fashion at any given time.
Burns believes that in the forthcoming period value type strategies will perform best as economies recover, and this is reflected in his decision towards the end of 2020 to increase his portfolios allocations to UK equities, relative to US shares, having previously been overweight US shares since 2012.
The UK stock market is generally regarded as having more of the economically sensitive type of stocks that thrive when the value style of investing is in favour, and fewer of the type of stocks that thrive when the growth of style of investing is in favour.
One of the UK value funds in which Burns is a long-time investor, including when it dwindled to £100m in size, is RWC Enhanced Income.
Burns said: “This fund has started to gain assets now, and to perform better. We have owned it for years, including when it went below £100m in size, but we stayed loyal and are being rewarded for that now.”
Another value fund in which he is a long-term investor is Man GLG Undervalued Assets, a £1.2bn fund run by Henry Dixon.
The fund is among the top performers in the IA UK All Companies sector over the past six months, having previously been among the worst performers.This upturn in relative performance coincides with the stronger performance of the value style.
Burns said this was an example of a fund he invested in when it was much smaller than it is now, and has continued to own as it got larger.
Ben Yearsley, investment director at Fairview, said the most important consideration when choosing a fund manager was that they stick with the style the use, and don’t deviate when it is out of fashion.
He said: “If you buy a value fund manager, the important thing is that you get what you paid for, that is, they persist with the style. It's the same with a growth fund, the worst thing to see is a fund that changes its style.”