Potter (pictured), who heads up nine funds of funds at the firm, including Thames River Distribution, says he does not doubt the ability of those that run multi-billion pound portfolios, but would much rather invest in a manager that can move in and out of companies and sectors as they please. "However good a ship’s captain is, the bigger the boat, the harder it is to turn around," said Potter.
"The more assets you hold, the less aggressive you can be when it comes to changing the positioning of your portfolio, which is why a lot of the larger funds get left behind during an upturn."
"The big boys were shown a fresh pair of heels last year."
Potter told FE Trustnet last week that he thinks the UK is in the early stages of an equity bull market.
As a result, he is avoiding defensive blue chips with little growth potential, which tend to have a higher weighting in the larger, more established portfolios in the IMA UK Equity Income sector.
"I think we are getting into a place now where it’s more likely investors 'buy the dip' rather than 'sell the rally'," he said.
"There are plenty of people saying 'carry on buying bonds and blue chip equity income funds and you’ll be fine'. In my opinion, they’re wrong."
"Whenever you invest using your rear-view mirror, you’re going to make a mistake. For us, it’s about looking forward and seeing what’s attractive on a two-year view."
Potter says an equity income fund of "around £1bn or less" gives the manager enough flexibility to change their positioning.
He points to James Lowen and Clive Beagles' JOHCM UK Equity Income fund as one he rates particularly highly in the IMA UK Equity Income sector. It has £1.4bn in assets under management (AUM), but JOHCM said it is looking at methods of slowing inflows into the fund.
"The managers absolutely screamed it last year," said Potter. "It shows you what you can get if you look a little further afield."
Performance of fund vs sector and index in 2012
Source: FE Analytics
According to FE data, seven of the 12 UK Equity Income funds with more than £1bn assets under management (AUM) underperformed both their sector and FTSE All Share benchmark in 2012.
While Potter has a preference for smaller equity income funds – he also holds the £109m RWC Enhanced Income and the £220m Lazard Global Equity Income portfolios in his top-10 – he admits he still has a soft-spot for Artemis Income, headed up by FE Alpha Manager Adrian Frost, which he holds in his range of F&C Lifestyle portfolios.
"This is the only one of the giant funds I’ve got left," he said.
"He was the first manager I ever met when I started my career back in 1989. The thing I like about Adrian is that all he does is manage funds – he doesn’t have any other job titles, he’s just an investor."
"A fund like this is something of an insurance policy, although he does things a little differently from the typical blue chip portfolios," Potter added.
Frost holds 74 companies in his portfolio, which is not as heavily concentrated as some of the other multi-billion pound options in the sector. The top-10 accounts for 33 per cent of assets, and 43 of the 74 companies have at least a 1 per cent weighting.
Artemis Income has £4.7bn AUM, making it the third biggest in the IMA UK Equity Income sector. Only Neil Woodford’s Invesco Perpetual High Income and Income funds are larger.
It was announced earlier this week that the Sanlam Private Investments Income Study has placed the two Invesco funds on its "Grey List", citing concerns over the funds' size and bias towards large cap stocks.