A fund’s past performance may be no guarantee of future returns, but the information is far from redundant for fund selectors.
Managers and portfolios with a record of strong returns can quickly develop a significant following. The flip side is that this success does not buy loyalty: investors are often quick to exit the most popular funds once performance starts to dip.
The retail investment industry is in the midst of significant consolidation: asset managers, discretionary fund managers (DFMs), platforms and advisers are all merging and acquiring one another at a rapid rate. Thus it may not be surprising that fund best-buy lists are also becoming more concentrated.
As Money Management’s DFM survey noted last year, the five biggest wealth managers in the UK account for a significant chunk of industry assets – an amount that has continued to rise year on year.
The roots of the problem have been growing for some time. Two years ago, a report from the Lang Cat and CWC Research suggested that “very few” DFM portfolios could claim to have unique or individual fund holdings.
A separate report by consultancy gbi2 and research house Fundscape also highlighted misgivings about these lists, saying some inclusions displayed “less performance substance and more reputational and sales momentum”.
The latter study said some “strong candidates for inclusion” had been omitted from buy lists as a result.
These developments present an opportunity for advisers. The pools of money controlled by many DFMs mean they are unable to invest in funds less than £50m in size – either for liquidity reasons, or because a smaller fund would not have a meaningful performance impact within a sizeable model portfolio. For some, the figure is closer to £100m, which makes it difficult for buyers to find ideas that can truly differentiate their portfolios.
Intermediaries have fewer issues in this regard, and there are plenty of neglected options out there. Last year, analysis by Money Management’s former sister title, Investment Adviser, found that a third of funds with a track record of three years or longer had failed to gather £50m in assets.
Buy lists analysed by gbi2 and Fundscape accounted for just 30 per cent of the available funds universe. This suggests many smaller funds with stellar performances are going unnoticed.
It is with these considerations in mind that Money Management has identified overlooked outperformers from the past three years. Our methodology, outlined in Box 1, uncovers strong performers with more than £10m but less than £100m in assets.
Table 1 and Table 2 detail two overlooked funds from each of our categories, which encompass a variety of different equity, bond and multi-asset sectors across both the open-ended fund and investment trust universes.
We have outlined the fund’s information ratio – which reflects the level of alpha a manager is delivering versus the sector average, as explained in Box 1 – as well as the size of the product, and its level of outperformance against its benchmark and peers over the past three years.