Investors are hampering potential returns by not investing in new fund launches and managers with short track records, according to several managers and advisers FE Trustnet spoke with. 
Traditionally for first-time investors the safest way to dip a toe into the market is to buy funds with long-tenured managers that have good long-term track records.
However, this approach comes with just as much risk and may, in some cases, mean investors miss out on superior returns from new managers building up their track record.
And it is not just new investors that are missing out, according to Downing fund manager Neil Shillito (pictured), who said that many industry experts also dismiss funds without a long track record.
“There are an awful lot of discretionary fund managers and multi-managers who won’t look at a fund unless it has got a three-year track record,” he explained. “Well that is a fat lot of use, as a guy might have a great three-year record but that was three years ago, so you’ve just missed all that.”
The technical reason younger managers may outperform some of their older peers is that they are more likely to be running a smaller fund.
Simon Evan-Cook, fund manager at Premier Asset Management, noted: “All other things being equal, it is much easier for a talented manager to get a small fund to outperform than a larger fund.
“This is because if you have a great idea, and it’s a small cap, you can put enough of your fund in it to make a big difference. But if you’re running a £50bn super fund, you can’t.”
“Younger people are also more open to new ideas. Sometimes this can be bad, but not always,” he added.
“A new, scar-free manager will be more prepared to consider a company that used to be badly run, but has changed its spots and such a company is likely to be a bigger opportunity, given the discount applied to it by older, twice-shy investors.”
While the risks of picking a new manager with a shorter track record is much higher, the rewards can also be greater.
“Yes, in terms of our own careers, it would be a safer bet to go with the tested manager,” he said. “But our investors aren’t interested in my career progression, they’re interested in decent returns.”
An example of a recent fund selection in the Premier Multi Asset portfolio range is the Prusik Asian Equity Income fund run by Tom Naughton.
The £722m fund has returned 168.8 per cent since its launch in 2011, beating the MSCI All Countries Asia Pacific ex Japan and the FO Equity Asia Pacific ex Japan sector by 110.8 and 136.48 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
“We bought in at the end of 2011, less than a year into its life. This meant, for starters, we were able to access the early-bird share class, which is cheaper. But it also means our investors have benefited from the excellent job Tom’s done in that time,” Evan-Cook said.
Psigma senior investment analyst Daniel Adams also bought into Naughton’s fund in 2011, though noted that this was a more specific case than an outright preference for new managers.
“We don’t specifically target boutique managers, but we do tend to find that the most successful managers will often move or be poached by strong shops or they opt to go solo,” he said.
“Because these managers are in such an enviable position, they will only move if the position and/or role is right for them; this is not always finically motivated, often it is about reducing their broader role in the business and instead returning to what they are good at, managing money.”
Indeed, this is the case with the five FE Crown-rated BlackRock GF Asian Growth Leaders run by Andrew Swan and Emily Dong, a recent addition by Rob Burdett, co-head of the multi-manager team at BMO Global Asset Management.
In the BlackRock example, Swan was brought into the firm after a long career at JP Morgan Asset Management where he was a portfolio manager.
“BlackRock is a global phenomenon and of all the big firms we think they are one of the best at managing talent within their business,” Burdett said.
“Asia was a blind spot for them – they had plenty of people out there but it just wasn’t generating the quality of returns that they needed to create.
“So, they looked around and they knew a guy that was the number two at JP Morgan which was previously the business known as Jardine Fleming and was one of the pioneers of investing in Asia in the 1960s and 1970s.”
Burdett said Jardine Fleming had always attracted great managers and was widely respected before the merger with JP Morgan, which has continued.
“They – under the noses of JP Morgan who were grooming Swan to take over really in a few years’ time – persuaded him rather than taking over the baton at JP Morgan of a very successful long-term business he could, in his own image, create a successful business for BlackRock,” he said.
The BlackRock Asian Leaders fund was launched in 2012 during which time it has returned 144.82 per cent, beating the MSCI AC Asia ex Japan index by 66.78 percentage points.
Performance of fund vs benchmark since launch
Source: FE Analytics
“We met him in Asia and he changed about three-quarters of the Asian team within about 18 months and chose to prove to the business and to his team by leading by example through this fund with his name and reputation on it. That is the kind of thing that we like to see in the larger companies,” Burdett added.
He said management changes in larger firms are not made very often and, therefore, if somebody is given a fund to run it usually means that the firm thinks the person is part of the future of the business.
“There has to have been an internal qualitative assessment and for those of us looking to buy funds no matter how much work we do the internal people will know their staff better than we ever will,” he said.
However, it is not just large companies where new managers deserve backing, with Downing's Shillito noting that the process is the most important aspect to an investor.
“We believe in process not past performance. So, if we really like the guy’s process, we like his enthusiasm and understand what it is he is doing [we will back him],” the manager said.
“There is a lot of history of managers with good track records running money for five years or more and then they start to lose the plot.
“It might be personal reasons, it might be that they lose confidence and their performance starts to slip so they do silly things to get the numbers up, all that can and does happen.”
One example of a boutique fund he is using is the little-known £126m Magallanes Value Investors Ucits Iberian Equity.
“It is an interesting fund because the bulk of the money at the moment is family money,” the manager said.
Run by portfolio manager Iván Martín since 2015, the fund which invests predominantly in Spain and Portugal but can move across the border has returned 28.18 per cent.
Performance of fund vs sector since launch
Source: FE Analytics
“He is a committed value investor, but he invests not only on the numbers: he gets to know the companies really well [and] does all the dirty stuff,” said Shillito.
“So, even if the numbers are good, if he doesn’t like the company he won’t invest on blind numbers [alone]. He has to understand the company and want to invest in it.
“He ran lots of money for big institutions so he already had a track record and then he was persuaded to leave and run this family money.
“The guy is doing a great job. So you can argue that the fund is new, which it is, except that the money has been there for a long time and the manager has been running institutional money for many years. At the moment he has no ratings because it is a new fund and a lot of managers will not invest.”